Why get a bridging loan with bad credit?
It’s easier to get a bridging loan with bad credit than to take out a traditional mortgage or loan. That is because the loan repayments are normally included in the loan. Therefore, the bridging lender doesn’t need to be so concerned about your credit history or your ability to meet the repayments. However, there are other important considerations you should know about.
Bridging loans are ideal for when you need extra money over a short term period. They are known as bridging loans as they help “bridge the gap” in your finances. Bridging is helpful for meeting the price of a new house if you still have yet to sell your previous home and can also be used to fund various business ventures. You could even use a bridging to simply pay off all of your credit and for a period of time have no monthly payments to make.
However, if you want a bridging loan while you also have bad credit, you could face challenges. Whilst a bridging loan with bad credit is possible, it’s viability will depend on whether you have any credit issues which could affect the exit strategy. This is particularly important if your proposed exit is refinance.
A golden rule for bridging – for your protection
There are two types of bridging finance.
- Regulated loans where you get extra protect from Financial Conduct Authority (FCA). These are normally secured against your home and the lenders and brokers who offer them have to be thoroughly vetted and face stiff penalties if they treat you unfairly.
- Unregulated loans where you have very little protection. There are many more unregulated lenders – some good – some with poor practices and severe penalties hidden in their small print. The brokers who offer them don’t have to be regulated to the same degree.
Always, always choose a broker who is regulated by the FCA. Even if the loan he arranges for you is unregulated, as a regulated and FCA authorised broker he or she still needs to have you best interests at heart and treat you fairly.
Bad credit taken in to consideration by bridging lenders or lenders arranging your refinance exit:
- Use of payday loans – These are a red flag to mortgage lenders and they see payday loans as an indication of a borrower under pressure so could affect your refinance. Bridging lenders, however, rarely take them in to consideration.
- County court judgements (CCJs) and defaults stay on your credit history for 6 years. The more recently they appear on your credit history the less likely you are to have an application approved. Whether the defaults or CCJs have been paid off, and when, could also impact your bridging and refinance application hopes.
- Bankruptcy can also stay on your credit history for at least 6 years. If a lender sees that you have a bankruptcy on your credit history, or that it hasn’t been cleared for at least 12 months, it will have a negative impact on their confidence in your application.
- Mortgage arrears could affect your bridging loan applications depending on how recently they occurred.
Whilst bridging lenders can take a more relaxed view on bad credit, they will always consider the impact of any bad credit on you achieving a smooth exit from the bridging loan.
Exit strategy is what is put in place for you to successfully exit your bridging loan. Having an exit strategy is vital and any reputable bridging lender wont lend without one. When a client reaches the end of their loan agreement, they are expected to pay the loan back in full. If they don’t they could face financial penalties or even repossession. Therefore, having a definite exit plan is important for you too. There are multiple exit strategies lenders consider, these being:
- The sale of Primary and/or secondary property
- Using inheritance
- Selling shares or other reliable, liquid investments
- Refinancing your bridging loan to a longer term
Exit strategies which are unlikely to be accepted are those which are not definitely achievable. Examples could include:
- You “hope” to get planning consent and then develop the property
- You are expecting (but can’t prove) a large bonus
- Your exit is partially dependent on refinancing but you can evidence that your refinance will be granted
In short, your exit needs to be nailed down and this is where a good broker may be able to find an alternative exit if your proposal is less than certain.
Unfortunately, certain lenders could turn you away without question because, if the bad credit affects the exit strategy, it could cause a lot of issues. This is especially apparent if further credit issues appear during the bridging loan term. If you can’t pay back the loan at the end of the term then the loan will become in default. Reputable lenders don’t want that. Disreputable lenders are less worried as it could allow them to charge you high penalties.
Extending your bridging loan
Extending the bridging loan with your lender can be tough for the borrower and generally the lender will charge an additional fee for doing so. Some will charge a higher rate and may even impose this higher rate for the full term of the loan. If you are near your max loan to value percentage you may not be able to roll up interest on the loan. Rolled up or capitalised interest is unpaid interest that is added to the outstanding amount on the bridging loan. In the event that it all gets too complicated, the lender could outright refuse your extension or insist you service the loan. You may not be able to afford to do so.
Refinancing to a different lender
Another alternative could be to refinance to a different lender. If your current lender cannot help you squeeze out of your exit strategy then refinancing with another lender could be the answer. One thing to note is that it could become expensive as you will have to pay setup costs again, due to it being a different lender. Plus, you will still have to consider your exit strategy. If you refinance without planning ahead you could just end up in a financial limbo. Worst case scenario, assuming you cannot repay the loan, the lender has the right to repossess the property involved.
Is it possible to apply for a bridging loan without a credit check?
A credit check will always be necessary when applying for a bridging loan with bad credit. Bridging lenders usually opt for a more manual approach to assessing a client’s credit rather than running a credit score. What amount of bad credit they accept will vary from one lender to another.
Bridging loan with bad credit as a second charge and third charge
Applying for a bridging loan as a second charge whilst also having bad credit can be more complicated. Trying to find a second charge bridging financier is more difficult as it is a pretty niche product. However they do exist and here at Promise Money we can help you find the product you are looking for. Alongside second charge loans, trying to find a third charge bridging loan would be harder especially with bad credit.
In conclusion, a bridging loan with bad credit is obtainable but you will definitely have to be well prepared. Providing ample security and a strong exit strategy will undoubtedly increase the options available to you. Making sure that your past credit issues have been resolved could make a difference as well.
Please get in contact with one of our experts if you have any queries or if you would just like to know more.