There may be certain circumstances when purchasing or re mortgaging a property in which a bridging loan is required to ‘bridge the gap’ before avenues for longer term financing are explored.
This guide explains what these type of loans are and whether they are suitable for your requirements. Additionally we will discuss attaining this type of finance if you have bad credit.
Table of Contents
- Understanding The Term Bad Credit
- What Are Bridging Loans?
- Bad Credit Bridging Loans
- When Is A Bad Credit Bridging Loan Suitable?
- Getting A Bridging Loan With Bad Credit
- Credit Issues Accepted By Bridging Loan Providers
- Prerequisites For Getting A Bad Credit Bridging Loan
- Exit Strategy For A Bad Credit Bridging Loan
- 1. Can you get a bad credit bridging loan without a credit check?
- 2. How long does a bad credit bridging loan take to get approved?
- 3. Can an insolvent or bankrupt customer get a bad credit bridging loan?
- 4. What is the best way of making it easier to get a bad credit bridging loan?
- 5. Are bad credit bridging loans available for limited companies?
Understanding The Term Bad Credit
To learn about bad credit bridging loans, you need to understand what the term bad credit means. Bad credit refers to someone who has had difficulty paying their debts on time.
There are three primary credit rating agencies in the UK in which lenders use to determine whether someone has this.
The credit reference agencies used in the UK are TransUnion, Equifax, and Experian, who utilise different methods to determine your credit score and subsequent credit profile.
An individual with adverse credit on their file can find it quite difficult to get a loan as they are considered higher-risk by most lenders.
What Are Bridging Loans?
Bridging loans, are short-term loans usually taken for a period of up to 12 months. They are generally taken to meet current liquidity needs while making arrangements for long-term financing.
Generally, it is taken by individuals intending to purchase a new home quickly before selling their current home or to purchase a property in need of renovation. Thus, it functions as a bridge between purchasing a new property and selling an old one as an example.
Read More: What Is A Bridge-To-Let Scenario?
Bad Credit Bridging Loans
Like standard bridging loans, bad credit bridging loans are provided for short periods.
Such loans may be provided for 18 months with certain lenders, but when you take them against your residential home for example, they are restricted to just 12 months.
This is because they then come under the purview of the Financial Conduct Authority (FCA) who place this restriction as it is a regulated bridge.
When bridging finance is repaid before the loan term ends, you only need to pay the interest for the duration the funds were borrowed in most cases.
Bridging loans can be taken out by individuals who have defaulted on payments earlier or have a low credit rating.
Because of this, usually the terms of these type of loans are stricter, and the interest rates are higher. Those requiring such loans are considered high-risk customers by lenders.
When Is A Bad Credit Bridging Loan Suitable?
Bad credit bridging loans are very beneficial in situations where it is not possible to arrange for other funds. These type of loans typically do not need to be repaid monthly due to including the facility of rolling up the interest, which is a major advantage.
It allows for saving funds and planning how to repay the loan and the interest at the end of the term in one go.
Importantly, an acceptable and suitable exit strategy should already be in place as part of the application process in order to ensure that the loan is suitable for your situation and that you can exit the loan when it comes to an end.
If we use the sale of property as an exit strategy for example, the crucial thing in such situations is that you should be able to sell the property at the expected price.
That is why lenders usually require documents providing information regarding the expected selling price when you apply for the loan as part of the initial application process.
Getting A Bridging Loan With Bad Credit
It can be tricky to get most types of loans with bad credit, but bridging loans are, to a certain extent, easier to get in such circumstances.
The reason is that the various charges, fees, and interest rates are all included under the loan terms and conditions, and importantly they are assessed heavily by the exit strategy alongside you as the applicant.
Lenders put a greater emphasis on the security deposit for the loan than on monthly loan repayments.
Generally, for bad credit loans, the deposit amount is non-negotiable. Once this is deposited, lenders have the legal authority to repossess the property if the loan is not repaid.
Once again having a suitable exit strategy to repay the bridging loan is essential.
Additionally, bridging loans are provided for the short term, which means the risk for that some lenders is lower. Such loans are generally repaid within one year, compared to mortgage loans that may remain active for several decades.
Still, some lenders may not be willing to provide bridging loans to customers with bad credit. So, it is important to look for a lender who offers such loans and has reasonable terms.
Credit Issues Accepted By Bridging Loan Providers
The type of credit problems that lenders offering bridging loans accept can vary from lender to lender, but certain loan providers accept borrowers with the following credit problems:
- Payday loan history
- County court judgements
- Home repossession
- Debt management plans
- Late payments and defaults
- Insolvency or bankruptcy
- Mortgage arrears
- Low credit scores
Prerequisites For Getting A Bad Credit Bridging Loan
Certain preparations are required if you’re planning to apply for a bad credit bridging loan.
1. Preparing The Required Documents
Before submitting the loan application, you will need to provide various documents that need to be checked and verified by the lender.
These include documents serving as proof of identity, income, address, etc. Bank statements will also be needed to prove you are financially stable.
2. Checking Your Credit Report
Go through your credit report and ensure there are no discrepancies. If there are, they need to be appropriately addressed, as the lender will also scrutinise the report.
3. Consulting A Specialist
A specialist such as a bad credit broker who has experience with bridging loans can be very helpful in helping you take out such a loan. They can help find the right lender and provide guidance through the application process.
Exit Strategy For A Bad Credit Bridging Loan
The exit strategy refers to your plan regarding loan repayment, which is extremely important when it comes to bridging finance.
A more robust and effective strategy involves making a larger deposit or maintaining a higher level of equity as this reduces the size required of the exit strategy, also it helps reduce the risk for the lender.
With lower risk, the chances of getting better rates are higher. But when planning an exit strategy, keep in mind that few loan providers accept non-standard exit strategies.
Such strategies involve paying back the loan through an investment or inheritance, these would be deemed speculative for example.
In most cases, you will need to make a deposit of around 30 to 35% for bridging finance, but for better rates, try to make larger deposits, if possible.
1. Can you get a bad credit bridging loan without a credit check?
Getting any type of new loan without a credit check is almost impossible as lenders will want to assess your creditworthiness.
That being said, your credit score is less important when determining your eligibility for certain loans as some lenders manually credit search and go from the information on your report, rather than an overall score.
2. How long does a bad credit bridging loan take to get approved?
The time required for a bad credit loan to get approved depends on the lender and can range from a couple of days to weeks or months.
3. Can an insolvent or bankrupt customer get a bad credit bridging loan?
Some loan providers may be willing to provide such loans to insolvent or bankrupt customers, but this may not be true for all lenders. A specialist broker with experience of bad credit bridging loans should be able to aid you with this.
4. What is the best way of making it easier to get a bad credit bridging loan?
You may find it easier to get a bridging loan with bad credit by providing a large deposit and having a good loan repayment plan (exit strategy). .
5. Are bad credit bridging loans available for limited companies?
Lenders providing bad credit bridging loans generally offer such services to both individuals and companies. However, they may require more security in the latter case.
Additionally most loans to LTD companies will be for landlords or unregulated areas of the bridging loan market.
If you’re looking to purchase a property but have bad credit, you may still be able to attain bridging finance.
Compared to other types of credit, there arguably can be less emphasis on credit history, which is one advantage of such loans. But having a proper exit strategy is crucial as the loan is unlikely to be granted without a suitable exit strategy in place.
If your exit strategy is remortgaging to a standard mortgage then you must prove eligibility for a mortgage before the loan can be granted.
So, if you’re considering applying for a bad credit bridging loan, it is best to consult a broker who specialises in them. They can help advise on an effective exit strategy and guide you through the application process.
Your home may be repossessed if you do not keep up repayments on your mortgage.
All content is written by qualified mortgage advisors to provide current, reliable and accurate mortgage information. The information on this website is not specific for each individual reader and therefore does not constitute financial advice.