Getting a bridging loan with bad credit

Bridging loans are a short-term funding option used by businesses and individuals to secure fast access to funding. These loans are secured against a property and can be very useful in certain situations, such as when you need funds for an auction purchase or a property that a traditional mortgage won’t cover.

But, can you get a bridging loan with bad credit? And if so, how?

In the following guide, we’ll take a closer look at this topic while addressing questions such as:

Can you get a bridging loan with adverse credit?

Bridging loan lenders are more flexible around applicant adverse credit issues than mortgage lenders. Your credit history is still a consideration though. 

As far as their use and benefits are concerned, bad credit bridging loans are just the same as the bridging loans you get with good credit. They are short-term and secured against a property you own or are about to buy.

The difference is bridging loan lenders who accept some levels of adverse credit will typically aim to reduce their risk of not being repaid by applying a higher interest rate than you might get if you had no adverse credit issues. This is called “rate loading”.

Some lenders will outline rates specifying the types of adverse credit accepted against that product, other lenders will calculate a bespoke rate.

What criteria do you have to meet?

Adverse credit is usually a red flag to lenders. It indicates that you might have an issue managing your finances, which means you are less likely to prioritise a new loan or line of credit. But it’s less of an issue with bridging loans, as the lender focuses more on your exit strategy, which is the plan that outlines how and when you will repay the loan.

Terms differ by lender. Some lenders are not prepared to give a loan to borrowers with bad credit, but if you have a good mortgage broker on your side, and define your requirement as needing a ‘bad credit bridging loan’ (i.e. a bridging loan with flexible criteria around adverse credit), you may be able to secure lending, even with the following credit issues:

• A previous bankruptcy (must have been discharged a year ago, or more)
• A previous repossession
• Defaults
• Late payments
• History of payday loans
• County Court Judgements (CCJs)

Each lender will outline the rules they set around adverse credit so be accurate when you share these details with your broker so they can advise you accurately and approach the right lender for you.

What type of credit score do you need?

If you’re applying for a bridging loan as an individual, you will be subject to a credit check. However, the lender won’t just check your score and pass or fail you based solely on the number.

Cases are assessed individually, and lenders consider a variety of factors, including your recent repayment history and credit use.

How much can you borrow?

The total amount you can borrow will depend on several factors:

• The lender
• Your financial situation
• The loan to value (LTV)

Bridging loans typically allow a maximum LTV of 75%, including any fees. The usual fees to cover include, but are not limited to, an arrangement fee (which can be from 1-2% of the total loan amount), valuation fees and legal fees. You will also pay interest, which is charged monthly and either repaid at the end of the loan term (a “retained interest” loan”), or paid monthly (a “serviced loan”).

A serviced loan will allow you to borrow more than a retained interest loan, when compared on a like for like basis, because as the borrower you are taking on more of the risk associated with the loan.

What type of exit strategy do you need?

An exit strategy is essential for good and bad credit bridging loans. It is a plan that outlines how and when you will repay the loan.

The exit strategy is one of the main reasons why credit scores aren’t so much of an issue with these loans.

An exit strategy may simply include selling the purchased property and using the profits from the sale to pay back the loan. Alternatively, you can use a bridging loan to purchase a dilapidated house or auction property, do it up, and then refinance with a mortgage at a later date that would be used to pay back the loan. Any of these methods to pay off the loan would be your exit strategy.

Lenders will consider many different exit strategies from bad credit borrowers, but if they’re not happy with the plan, they may refuse the loan:

• Sale of other properties: You may choose to repay a bridging loan using the proceeds of selling another property you own.
• Sale of investments: You may repay your loan by cashing in other investments (e.g. stocks and shares). You’ll need to prove to the lender that these assets exist and you can access them when needed.
• Refinancing to a mortgage: If you’re using this option, an agreement in principle from the lender offering you a mortgage will demonstrate you will have funds to pay back the bridging loan.
• Inheritance: Using funds coming from an inheritance to pay back a bridging loan must be guaranteed. You will need to prove that the money will be there.
• Bridge to let: if you are repurposing your former home as a rental property, and need to use a bridging loan to quickly get funds in place, you may then exit to a buy to let mortgage to pay back the bridging loan.

If the exit plan fails, you may be hit with default charges and other fees and will need to refinance, extend the loan, or pay it off by some other means. This can be stressful and costly, which is why it is vital you can rely on your intended exit plan.

Does the type of property affect the process?

Typically lenders assessing a residential property will look for a standard brick wall and tiled roof construction, but there are lenders who will accommodate variations on this. Where the security property is a commercial premises, construction materials are more likely to vary.

If your property is not a standard brick and tile construction, a bridging loan advisor can help guide you on which lender can help you, as they will be familiar with the criteria each lender uses.

The types of adverse credit that lenders will consider

Lenders consider most types of bad credit, including CCJs, bankruptcies, and late payments.

Remember: Think carefully before securing other debts against your property. Your property may be repossessed if you do not keep up repayments on your mortgage. By consolidating your debts into a mortgage you may be required to pay more over the entire term than you would with your existing debt.

The takeaway is that having a negative mark on your credit report won’t always prevent you from getting a bridging loan, even if the issue occurred recently. However, the more marks you have, the harder it becomes, the fewer options you have, and the more work you need to do in other areas (security, exit plan, etc.).

Getting a bridging loan with adverse credit via a limited company

You don’t need perfect credit to get a bridging loan as a company, but the worse your credit profile is, the harder it becomes.

Lenders will typically assess the credit profile of company directors and shareholders as well as the company itself. Poor personal credit of directors can still affect the outcome.

Getting a bad credit bridging loan as a second charge

If you want to secure the bridging loan as a second charge and you have bad credit, the application process will be a little more complicated. In such cases, you need a specialist product, and that’s something that an expert broker can help with.

To get specialist help and secure the best bad credit bridging loans for all purposes, speak to one of our brokers. They can answer your questions, assess your situation, and help you to find a loan that meets your specific needs.

Alternatives to consider

Bridging loans aren’t the only way to access fast funding. You can get a personal loan or borrow from friends/family. Asset finance (borrowing secured on high value equipment) or a secure business loan may be appropriate if you are a business owner. If you have more time, you could look into buy to let mortgages for rental properties, or commercial mortgages for business premises.

Once you have an offer accepted on your chosen property, send us your details for an advisor call-back, to get more information and to find a suitable product.