Can You Get a Bridging Loan with Bad Credit?
Bridging loans are short-term financing solutions designed to bridge the gap between the purchase of a new asset and the sale of an existing one, but can you get a bridging loan with bad credit?
Typically, borrowers use bridging loans to buy a new property while still selling their current one. Property developers, landlords, and investors often use them for various purposes, such as business investments or property development projects. The main advantage of bridging loans is their ability to provide quick access to funds.
Understanding Bridging Loans
Before diving into the credit aspect, it’s important to understand how bridging loans work. Bridging loans are generally secured against an asset, often real estate. They are characterised by higher interest rates compared to traditional loans because of their short-term nature and the speed with which they can be arranged. The loan amount, interest rate, and terms depend on the value of the asset used as collateral and the lender’s assessment of risk.
Impact of Bad Credit
Having a bad credit score can significantly impact the ability to secure traditional financing. Bad credit typically indicates a history of late payments, defaults, or other financial difficulties, leading lenders to view the borrower as a higher risk. Consequently, traditional lenders such as banks might be hesitant to provide loans to individuals with bad credit, preferring to lend to those with a demonstrated history of financial responsibility.
Can You Get a Bridging Loan with Bad Credit?
The short answer is yes, it is possible to get a bridging loan with bad credit. However, there are important considerations and potential obstacles to be aware of:
Collateral is Key
Bridging loans are secured loans, which means that the lender has a claim on the asset used as collateral. The security provided by the asset can make lenders more willing to offer loans to individuals with bad credit. As long as the value of the collateral is sufficient to cover the loan amount and potential interest, lenders may overlook a poor credit history.
Higher Interest Rates
Borrowers with bad credit should expect to pay higher interest rates on bridging loans. The increased rate compensates the lender for the additional risk associated with lending to someone with a poor credit history. While this makes the loan more expensive, it still provides access to funds that might not be available through other means.
Specialist Lenders
Traditional banks might be reluctant to offer bridging loans to those with bad credit, but specialist lenders often have more flexible lending criteria. These lenders focus more on the value and security of the asset being used as collateral rather than just the borrower’s credit score. Working with a mortgage broker or financial advisor can help identify these lenders.
Loan-to-Value (LTV) Ratios
The loan-to-value ratio is a key factor in bridging loan applications. Lenders may offer lower LTV ratios to borrowers with bad credit, meaning that a smaller percentage of the asset’s value can be borrowed. This ensures that the lender is adequately protected if the borrower defaults.
Exit Strategy
A clear and feasible exit strategy is crucial when applying for a bridging loan, especially with bad credit. The exit strategy is the method by which the borrower plans to repay the loan, typically through the sale of an asset or securing long-term financing. A solid exit plan can reassure lenders and improve the chances of loan approval.
Deposit Requirements
Some lenders may require a larger deposit from borrowers with bad credit to further mitigate risk. This larger upfront payment reduces the loan amount and demonstrates the borrower’s commitment and ability to contribute financially.
However, if an additional property can be offered as additional security it is possible that up to 100% of the purchase price of the property being purchased can be attained.
Tips for Securing a Bridging Loan with Bad Credit
To improve the chances of securing a bridging loan with bad credit, consider the following tips:
Work with a Broker: Engaging a knowledgeable broker can help identify lenders willing to work with bad credit borrowers.
Prepare Documentation: Having all necessary financial documents and a solid exit strategy ready can streamline the application process.
Negotiate Terms: While interest rates may be higher, there may be room for negotiation on other loan terms, such as repayment schedules or fees.
Improve Creditworthiness: Taking steps to improve your credit score, such as paying off existing debts, can make you more attractive to lenders.
Securing bridging finance involves several steps, but with the right approach, property investors can access the funds they need swiftly and efficiently.
Reach out and give us a call, at Evolve Finance we specialise in and understand how bridging loans work and can guide you through the intricacies of the process, helping you explore all available options.
Conclusion
While bad credit presents challenges, it does not necessarily preclude securing a bridging loan. By leveraging collateral, working with specialist lenders, and presenting a strong exit strategy, borrowers with bad credit can still access the funds they need. However, it is crucial to carefully consider the costs and risks associated with bridging loans, particularly the higher interest rates and fees, to ensure they align with your financial goals.