Raising funds for a property purchase for buyers and developers with a less-than-perfect credit history can prove to be quite challenging. Lenders offering traditional mortgages are cautious about approving loans to clients with previous financial issues as they are viewed as high-risk.
For those in this situation, bridging finance is a viable option to consider. But can you get a bridging loan if you have bad credit? In most cases, the answer is yes!
A bridging loan is a short-term, secured loan, usually 12 months, that is fast to arrange and is paid back in full at the end of the loan term, as set out by an exit plan. The exit plan assists the lender in assessing the suitability of the applicant and will have a significant impact on whether the loan is approved or not. So, for example, if a buyer is planning on paying the bridging loan with a mortgage at the end of the term, this may be a red flag for the lender as the chances of a buyer with credit problems being accepted for a mortgage may be low, and therefore the risk is high.
Not all lenders are willing to lend to bad-credit customers, so it is imperative that you only approach the ones that are. A competent, all-of-market broker will be invaluable when it comes to finding the right lender for a buyer’s individual circumstances.
Under what circumstances can I apply for a bridging loan?
Lenders who offer loans to clients with credit rating issues typically accept the following situations:
- Low credit score or no credit record at all
- Mortgage arrears
- Late payments
- Individual Voluntary Arrangement and DMPs (Debt Management Plan)
- CCJs (County Court Judgements) and defaults
- Repossession
- Bankruptcy
What are the eligibility criteria for bad credit bridging finance?
Although a credit check will be done, lenders will look at many other factors when considering an application:
- Exit strategy: This is important as it will indicate to the lender whether the loan can realistically be repaid.
- Security: This is collateral offered by the buyer that can be used to offset the loan if repayments are not made. The greater the security offered, the more funds can be raised.
- Business plan: If the loan is for development or commercial purposes, lenders will need to see a viable business plan.
- Experience: For developers and investors, this experience will give the lender more confidence in their ability to complete the project successfully.
- Deposit: The size of the deposit will have an impact on a successful application. The bigger the deposit, the better, as you will be offered more competitive interest rates. The majority of lenders will require a 30% to 35% deposit.
Only a few specialist lenders will accept non-standard strategies, which can include circumstances such as repaying the loan through inheritance or investment.
Should I use a broker for adverse credit bridging loans?
Consulting an experienced broker will significantly improve your chances of being accepted for a bridging loan. Brokers are likely to be able to easily identify the lenders who will be willing to say yes, which is important as a declined application from the wrong lender may further impact your credit record.