Can you get a bridging loan with bad credit or a low income?
Original Article by: Bridging Loan Directory
A county court judgment (CCJ), missed payments or an irregular income can make conventional borrowing difficult. They do not necessarily rule out a bridging loan.
Some bridging lenders will consider circumstances that fall outside mainstream mortgage criteria. However, the fact that bridging finance is secured against property does not mean your financial position will be ignored.
The lender will still need to understand the borrower, the property, the reason for the loan and how the debt will be repaid.
Can you get a bridging loan with bad credit?
It may be possible, depending on what happened, how recently it happened and whether it affects the proposed transaction or repayment strategy.
Circumstances that can make conventional borrowing more difficult include:
Missed or late payments
Mortgage or secured loan arrears
Defaults
County court judgments
Individual voluntary arrangements
Previous bankruptcy
High levels of existing borrowing
A limited credit history
These circumstances do not all carry the same significance.
A settled CCJ from several years ago may be assessed differently from recent mortgage arrears. An isolated problem caused by a particular event may be viewed differently from an established pattern of missed commitments.
A bridging lender is likely to consider:
What happened and why
When it happened
How much was involved
Whether the debt has been settled
Whether there have been further problems
Whether it was disclosed at the beginning
Whether it could prevent the planned exit
Two borrowers described as having bad credit could therefore receive very different lending decisions.
What if you are currently bankrupt or in an IVA?
Active bankruptcy, an individual voluntary arrangement (IVA) or another insolvency process is materially different from historic adverse credit.
It may restrict the borrower’s ability to deal with property, offer security or provide a personal guarantee. The legal consequences depend on the insolvency arrangement and where in the UK the borrower lives, so specialist legal and debt advice may be required before an application can be considered.
For example, GOV.UK explains what may happen to a home during bankruptcy in England and Wales.
A lender willing to consider an old default or settled CCJ will not necessarily accept an applicant who is currently subject to an insolvency process.
Does your credit score decide whether you can borrow?
A consumer credit score is unlikely to be the only factor behind a bridging lender’s decision.
Lenders may obtain information from one or more credit reference agencies and apply their own underwriting criteria. Credit reference agencies can hold different information, so the detail behind a score may be more useful than the number itself.
The Financial Conduct Authority has explained that lenders use credit information to help inform lending decisions. This can include repayment history, outstanding borrowing and public information such as CCJs and insolvencies.
Checking your credit reports before applying may help you identify inaccurate information or an issue you had forgotten about. If something is wrong, you can ask the relevant lender or credit reference agency to investigate it.
Can you get a bridging loan without a credit check?
You should not assume that a loan described as suitable for adverse credit or assessed mainly against the property will involve no checks.
A lender will normally investigate the applicant, existing financial commitments and the source of funds. Identity, fraud-prevention and anti-money-laundering checks will also form part of the process.
The type of credit search and the importance attached to its findings can vary. Some lenders may accept circumstances that fall outside mainstream mortgage criteria, but they will still need enough information to assess the transaction.
Claims that finance is available with no checks or questions should be treated cautiously.
Can you get a bridging loan with little or no regular income?
A low income does not automatically prevent someone from obtaining a bridging loan. Neither does being self-employed, receiving income from several sources or having earnings that vary from month to month.
Having no regular income is not the same as having no means of repayment. However, a lender will need evidence that the proposed exit is realistic.
The importance of income depends partly on:
How the bridging loan will be repaid
Whether interest is retained, rolled up or serviced
Whether the loan is regulated
What costs the borrower must meet during the term
If the property will be sold
Where the exit is a sale, the lender will examine the property’s marketability, expected sale value and the time reasonably required to find a buyer.
The likely net proceeds must be sufficient to repay the loan, interest and other costs. There should also be some allowance for a lower sale price or a longer marketing period.
The borrower’s wider financial position may still matter, particularly if they need to meet property, insurance or project costs while waiting for the sale.
Regulated bridging loans are subject to the relevant FCA responsible-lending rules, including specific provisions for bridging and interest roll-up facilities. The lender will still need to examine the repayment strategy and apply the requirements relevant to the proposed structure.
If the loan will be refinanced
Income may become more important where the exit depends on refinancing onto a mortgage or another longer-term facility.
The future lender could apply different affordability, rental coverage, credit and property criteria. Receiving a bridging loan does not guarantee that the planned refinance will subsequently be available.
Where possible, the borrower should establish what the next lender is likely to require before entering the bridge.
If interest will be paid monthly
Bridging interest is often rolled up or retained, although some facilities allow or require it to be serviced monthly.
Serviced interest creates a regular outgoing, so the lender will need to be satisfied that the payments are affordable.
Rolled or retained interest avoids that monthly payment, but the interest still forms part of the cost. Depending on the structure, it may increase the amount due at redemption or reduce the net funding received at the beginning.
What if you are borrowing through a limited company?
Using a limited company does not necessarily remove the relevance of personal credit history.
A lender may investigate the borrowing company, its directors and shareholders, anyone providing a personal guarantee and other connected businesses.
Historic adverse credit belonging to one director may not prevent a loan, particularly if it has been explained and does not affect the transaction. Financial problems within the borrowing company or involving a proposed guarantor may carry greater weight.
The lender’s approach will depend on its criteria, the security being offered and the circumstances behind the credit issue.
What will a bridging lender assess?
Bad credit or limited income will not usually be considered in isolation. The lender will look at how the different parts of the transaction fit together.
The property and transaction
The lender will consider the property’s value, condition, title and likely demand, together with the purpose of the loan and any existing secured borrowing.
If another lender already has a charge, the proposed facility may need to be structured as a second or third charge bridging loan.
Interest, fees and existing charges can all reduce the net amount available. A low headline loan-to-value does not make the transaction viable by itself.
The exit strategy
The exit explains how and when the bridging loan will be repaid.
If the exit is a sale, the lender will assess its likely value and marketability. If it is a refinance, the lender will consider whether the borrower and property are likely to qualify for the replacement finance.
A valuable property is not a substitute for a repayment strategy. Repossession protects the lender if the loan fails; it is not an acceptable plan for repaying it.
The reason for the adverse credit
An explanation can help the lender distinguish between an isolated historic event and an ongoing financial problem.
Evidence might include confirmation that a debt has been settled, documents relating to a dispute or information showing that the borrower’s circumstances have since changed.
Being open about the position gives the lender and broker the best opportunity to assess the case properly.
Disclose credit problems before incurring costs
Valuation and legal fees may become payable during a bridging application, whether or not the loan ultimately completes.
Adverse credit should therefore be disclosed before those costs are incurred. The lender or broker can then establish whether the issue appears to fall within the lender’s appetite.
An initial indication or decision in principle is not a guarantee that the loan will be approved. It can, however, identify an obvious problem before the application moves into its more expensive stages.
The information provided must be complete and accurate. Discovering an undisclosed CCJ, debt or insolvency event later can delay the application or cause the lender to reconsider its terms.
Will bad credit make bridging finance more expensive?
Adverse credit can reduce the number of lenders prepared to consider an application. It may also affect the interest rate, maximum loan-to-value or other conditions.
That does not mean every borrower with bad credit will receive the same higher rate. The lender will price the transaction as a whole, considering factors such as:
The property and its location
The loan-to-value
The nature and age of the credit problem
The purpose and term of the loan
The strength of the exit strategy
The borrower’s experience
The complexity of the legal and valuation work
The interest rate is only one part of the cost. Arrangement, valuation, legal and broker fees may also apply, along with possible extension or default charges.
Our guide to bridging loan fees explains the costs to check when comparing facilities.
Is bad-credit bridging the same as non-status lending?
The terms are connected, but they do not mean the same thing.
Bad credit describes the borrower’s previous financial conduct.
Non-status lending is an older and sometimes loosely used description for lending where the property, transaction and exit may carry more weight than conventional income evidence.
It does not mean the applicant’s circumstances are irrelevant or that no checks take place.
Our guide to non-status bridging loans explains how the term is used and what lenders may assess.
Does bad credit determine whether a loan is regulated?
No. A bridging loan does not become regulated or unregulated because the borrower has bad credit or a low income.
Its regulatory status depends on factors including who is borrowing, the property being offered as security, how it is occupied and the purpose of the finance.
A loan secured against a home occupied, or intended to be occupied, by the borrower or certain family members may fall within regulated mortgage rules. Business and investment transactions are often unregulated, although their individual circumstances must be checked.
Read our guide to the difference between regulated and unregulated bridging loans for a fuller explanation.
Will a bridging loan improve your credit score?
A bridging loan should not be taken out for the purpose of repairing a credit score.
Whether and how the facility is reported to credit reference agencies can vary between lenders. Borrowers should ask about the lender’s reporting practices before proceeding.
Repaying the loan as agreed may prevent further damage to the borrower’s credit history, but it should not be assumed that doing so will produce a particular improvement in their score.
Failing to repay on time or breaching the loan terms may make future borrowing more difficult. It could also result in additional interest, default charges or enforcement action.
What are the main risks?
Bridging loans are short-term facilities secured against property. If the loan is not repaid, the property could ultimately be repossessed and sold.
The principal risks include:
Having fewer refinancing options when the term ends
Relying on a sale at an unrealistic price
Underestimating interest and other charges
Receiving less net funding than expected
Assuming that the term can simply be extended
Being unable to meet property or project costs
Incurring valuation and legal costs before approval
Using short-term finance without addressing wider financial difficulties
If the adverse credit reflects ongoing financial difficulty rather than a historic problem, consider obtaining independent debt advice before using a property as security for further borrowing.
What should you prepare before applying?
Providing clear information early can help a lender reach an informed decision.
Depending on the transaction, you may be asked for:
Identification and proof of address
Personal or business bank statements
Details of existing debts and secured borrowing
A copy of your credit report
An explanation of adverse credit
Evidence that debts have been settled
Property and title information
Details of the purchase or proposed works
Evidence supporting the exit strategy
Accounts or tax documents
Proof of deposit and source of funds
Information about the intended refinance or sale
Details of experience with similar transactions
Not every case will require the same documents. What matters is that the information is accurate, complete and consistent.
Questions to ask before accepting a loan
Before committing, make sure you understand:
How much money you will receive after interest and fees
The total amount expected at redemption
Whether the rate is fixed or variable
What happens if the loan is not repaid on time
Whether extension or default charges apply
What evidence is required for the exit
Whether monthly interest payments are expected
Whether the lender reports to credit reference agencies
Whether the loan is regulated or unregulated
What property, guarantees or other security will be taken
Bad credit or an irregular income may reduce the number of available lenders, but neither necessarily prevents a bridging loan from being agreed. What matters is whether the property, borrowing requirement, total cost and proposed exit form a transaction that can be supported.
Where refinancing is the exit, its feasibility should be considered before the bridging loan begins—not when its repayment date is approaching.
You can compare bridging loan lenders through Bridging Loan Directory or find a specialist bridging finance broker to discuss your circumstances.
Bridging finance is secured against property. Your property may be repossessed if you do not repay the loan. This guide provides general information and does not constitute financial or legal advice.
