How do lenders assess bridging loan applications?

How do lenders assess bridging loan applications?

When you apply for a bridging loan, lenders look at several factors to decide if they will offer you the loan. This type of loan is often used to bridge the gap between buying a new property and selling your current one. Understanding how lenders assess these applications can help you secure the financing you need.

Credit History and Risk Assessment

Lenders start by looking at your credit score or a credit search. If you don’t have a personal credit search you can get a free one. Our search is really great as it gives you results from 3 separate credit agencies which tells you and us what the lenders see. This helps get us on the right track immediately. Most lenders don’t do their own credit search until much later.

You can get your free credit search here. It’s free for 30 days but £14.99 per month thereafter although you can cancel it at anytime

A good credit score can make it easier to get a regular mortgage or loan. They check your past loans and credit cards to see if you pay on time. This tells them how risky it might be to lend you money.

However, with bridging loans it is different. This is because the interest is often rolled up into the loan and repaid when the loan is settled. Therefore there is less reliance on you being able to service the monthly interest payments. Rather than looking at a credit score come at bridging lenders will look for defaults and court judgments as an indication of the borrowers character. Specifically their willingness and ability to adhere to legal agreements.

Therefore, if there are outstanding court judgments and defaults, some lenders may ask for these to be settled before the loan is paid out. However, there are others which take a more relaxed view.

Bear mind, if you are thinking of refinancing to repay the bridging loan, your credit history once again can come into play. You will need to be able to evidence you can get a refinanced with your current credit history.

Affording the loan

With a standard mortgage the lenders also look at your current debts and how much you earn. This helps them see if you can pay back the loan. If your debts are high compared to your income, it might be harder to get the loan.

As mentioned above bridging loans are different. If you are planning to service the interest payments each month comment lenders will have more regard to your affordability and credit history. However if the interest is being added to the loan they are far more relaxed. Instead they will need to make sure that the proceeds of the property sale can support the entire loan including any interest which has been accrued. As mentioned above, if you’re proposed exit is to refinance, any new loan will need to also pay off the loan and accrued interest from the bridging loan.

Property Value and Loan Security

The property you are buying plays a big role in the lender’s decision. Lenders will have the property valued to make sure it is worth the amount you want to borrow. This value also affects how much they will lend you.

Lenders will generally offer better rates and higher LTVs secure against properties which they consider to be easily sailable and low risk. A standard residential property in a popular area of town is ideal. A commercial property in a rural part of the country is less easy to sell and this factor will be reflected in the LTV offered and the interest rate.

In most cases, the lender will want the property to be in good condition so it can easily be sold. However there are exceptions where the property is due to be improved in some way which will increase its value. 

Residential Refurbishment Loan

In this scenario, the lender may offer a higher loan at the beginning or structure the loan to pay for some of the improvements being carried out. There are various different approaches and this video will tell you more. Broadly speaking, rather than getting a gross loan of between 70% and 75% loan to value, you can aim for 85% LTV.

Conversion of a Property to a Different Type of Residential Use

Often this type of project involves higher costs and a higher end value (called the gross development value – GDV).
Generally, lenders are more inclined to contribute towards the conversion costs. As a property developer, your aim needs to be to have funds to cover the purchase deposit, the first phase of the works plus fees, stamp duty, legal costs, community infrastructure levy etc

This video will explain more about these types of facilities.

Exit Strategy

Lenders want to know how you plan to pay back the bridging loan. This is called an exit strategy. Most people plan to pay it back by selling their property or getting a long-term mortgage. Others look to refinance and will be expected to evidence that they can reasonably obtain finance when the time comes. This is the point where their credit history may be very relevant

You need to show the lender a clear plan for how you will pay back the money. Without it, they are unlikely to grant the loan. Beware any lender offering bridging finance without confirming the exit in detail. They may be more interested in repossessing your property then giving you a facility which works.

Loan-to-Value Ratio

The loan-to-value (LTV) ratio is also important. This is the percentage of the property’s value that you want to borrow. For example, if a property is worth £100,000 and you want to borrow £75,000, the LTV is 75%.

Lenders usually offer lower LTVs for bridging loans, often around 70% to 75% on standard residential properties.
On Commercial or semi-commercial property the LTV is lower as the properties are not as quick or easy to sell. Typically the Range is between 60% and 70% LTV.
If the security is land, with or without planning, straightforward bridging is likely to be at between 50% and 60% LTV

As mentioned above, there are specific schemes for refurbishment and development which allows borrowers to raise more cash based on the final gross development value.

Speed of Application

One big benefit of bridging loans is that they can be arranged quickly. This is important if you need to buy a new property before selling your old one.

Lenders will look at how quickly you need the money and if they can process your application in time. Being prepared with all the needed documents can help speed up the process. All lenders will claim to be fast. Your broker will have experience of which lender is likely to be fastest in your scenario.

Your broker will also know which lenders can offer some of the following techniques to speed the process up.

• Automated valuation or desktop valuation – cheaper and faster
• Some lenders will instruct solicitors at the start of the process at their own risk – faster and can save you a board of costs
• Some lenders using insurance to reduce the amount of legal work required – cheaper and faster
• There are lenders which are just generally more nimble, work faster and less picky. Your broker will know if these are available to you

People Also Asked

What is a bridging loan?

A bridging loan is a short-term loan used mainly in real estate to cover the gap between buying a new property and selling an existing one. It helps buyers fund the purchase before getting long-term financing in place.

How long does it take to get a bridging loan?

It can take anywhere from a few days to a few weeks to secure a bridging loan, depending on the lender and your situation. Having your documents ready can speed up the process.

Are bridging loans more expensive than regular loans?

Yes, bridging loans usually have higher interest rates than long-term loans because they are considered riskier and are shorter in term. They also may have additional fees like arrangement or exit fees.

Can I get a bridging loan with bad credit?

Yes, it’s possible to get a bridging loan with bad credit, but it may be more challenging. Lenders might ask for a higher deposit or charge a higher interest rate to offset the risk.

What happens if I can’t pay back a bridging loan?

If you can’t pay back a bridging loan, the lender might charge additional renewal fees or higher rates. Ultimately they could take legal action to recover the money. This could include taking possession of the property used as security for the loan.