A bridge loan is a short-term loan of a year or less used to cover the time between when long-term financing is needed and when it will be available. Bridge loans are typically high-interest loans that require some sort of collateral. The best and most common example is when a homeowner wants to purchase a new home before their existing home sells. They can use the equity in their current home as collateral and use the bridge loan to proceed with their new home purchase giving them time to sell their house.
If you find yourself in a situation where you need a bridge loan, but your credit is bad, you have options. The biggest concern for lenders in a bad credit situation is the exit strategy for your bridge loan. If you have a solid exit strategy, lenders may work with you.
Will Bridge Loan Lenders Work With Credit Problems?
Depending on your credit problem, lenders may still work with you on a bridge loan. If your credit issues are among the following, a lender may work with you as long as it doesn’t impact the exit strategy:
- Payday loans.
- No credit history.
- Low credit score.
- Late payments.
- Missed mortgage payments.
- Debt management schemes.
- Individual voluntary arrangements (IVA).
- Count court judgments (CCJ).
Again, if you have any of these issues, lenders will be more willing to work with you if those issues don’t prevent paying the bridge loan at the end of the term. For example, if you plan to sell a property, lenders will most likely work with you. If your end game is a refinance, that’s less likely to happen, and you will need to find a bad credit lender. The severity of issues is an essential factor, along with the loan-to-value ratio for the loan.
Does a Bridging Loan Require a Credit Check?
Yes, just like other loans, the lender will want to check your credit to see what issues, if any, are present in your history. However, they don’t just look at the score like a traditional mortgage lender. They will most likely do a manual review of the report to determine the issues and determine if they would be willing to work with you. While good credit is attractive, it’s not the only factor that they consider. Lenders also look at the following factors:
Your exit strategy is probably the most significant factor a lender will consider on their eligibility checklist. These are interest-only loans so how you pay your loan at the end of the term is of the utmost importance. Again, if your endgame is to remortgage, that may be tough to get. But if you can show the property is a lucrative investment, they may be willing to work with you. A bridge from one home to another is probably the easiest exit strategy to work with for bridge loans.
Another option that some lenders may accept would be non-standard exit strategies. These would be methods such as endowments, investments, or inheritance that the borrower expects to receive within the time frame of the loan to pay off the loan. This can help if you’re in a remortgage situation. Lenders may impose daily interest rather than monthly in this scenario, however.
Strong Collateral Property
When procuring a bridging loan, you can secure the loan against either the property you buy, one you already own, or other assets. If you can show that the property in question is certain to raise funds once the sale or remortgage goes through, this can go a long way in offsetting the risks demonstrated in your credit report. The lender will analyze your property’s saleability, examining factors such as location and other factors that might deter buyers like liens and non-standard construction.
If there’s any commercial aspect to the property you’re buying, the lender will need to see a business plan. The lender will need to know how you intend to make the venture profitable and evaluate the viability of the investment.
Not all lenders will prefer or require the borrower to have previous experience buying and selling property, but it can help your case either way. If the lender is on the fence about approving you, having a history of successful transactions can help tilt the scale in your favor. If the venture you are looking to engage in is a complex development-type project, the experience becomes a more significant factor, and a good track record becomes more imperative. However, if you can provide the lender proof of your expertise and success, they’re more willing to overlook poor credit factors.
You’ll almost certainly need a healthy down payment if you have bad credit when using bridging financing, likely in the 30% to 35% area. However, if you can come up with an even larger down payment, your odds significantly increase. Just like in a standard mortgage, where the best rates are offered with a larger down payment, the odds of procuring a bridging loan increase the larger your down payment.
Income and Debt to Income Ratio
Getting a bridging loan can be easier if you have a high income and have kept your overall debt relatively low. The lender will first make sure you have a solid income to justify lending you money, but they’ll also look at your debt. Lenders will check your monthly income against your monthly payments to find your debt-to-income ratio. The lower that is, the higher your chances are.
A lender’s only concern is about the ability to recoup their investment and make a profit. Lenders will be more willing to look past dings on your credit history if you can demonstrate how you plan to repay the bridge loan. Finding the right property, improving your circumstances, and having a solid plan can help you get bridge financing regardless of your credit standing.If you’d like more information on financing options, including bridge loans, reach out to the knowledgeable team at Titan Funding. We’d be happy to answer any questions you may have. You can reach us at 855-928-0737 or complete our convenient and secure online contact us form.