What You Need To Know About Bridging Loan Requirements

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Need an immediate cash flow to secure a new property deal or pay some obligations? Luckily, bridging loans exist. They’re short-term loans, usually from a few weeks to a few years. However, landing a deal on a bridging loan requires a solid exit strategy to pay your lender, such as selling an asset or a property. 

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What about the other lending criteria? Do I need a high credit score? Every lender has different loan requirements and multiple loan plans to suit every borrower. But generally, there are some standard loan requirements that you’ll have to meet.

If you’re unsure if a bridging loan is feasible, we’ll help you make an informed decision by reviewing everything you need to know about bridging loan requirements.

The Basics: What Are Bridging Loans?

So, what are bridging loans, gap financing, interim financing, or swing loans? They are all terms used to describe short-term financing options that help borrowers get immediate cash flow to secure deals or pay their obligations.

As the name “bridging loan” suggests, the main goal of bridging loans is to bridge the gap when you need immediate access to money, but it’s not readily available. In other words, you get temporary funds from your lender to cover your needs until you can access permanent financing options to repay your lender.

Bridge loans are most common in real estate. Imagine you want to move out to another home but don’t have enough cash to secure a deal on that new property. Now you need to sell your current house to secure enough cash for the new one, but you’re unsure when your old house will be sold. Pretty frustrating, right?

That’s when bridge loans come in handy. As a homeowner, you can apply for a bridge loan to get temporary funds to pay for your new house. This gives you enough time, money, and even peace of mind to manage your finances until you sell your old property.

What’s The Difference Between Open And Closed Bridging Loans?

The main difference between open and closed bridging loans is your repayment date. Open loans don’t require a fixed repayment date, so you don’t have to repay your lender immediately after selling your current property.

Whilst most lenders expect you to pay your debts within one year, some lenders may offer extended repayment periods, but that’s not too common.

On the other hand, closed bridging loans have fixed repayment dates. That means lenders will set a specific repayment date, usually when you sell your property or have access to long-term finances.

Bear in mind that closed bridging loans are often cheaper than open bridging loans, mainly because there’s less flexibility as you’re required to repay your debts on a specific date. This allows the interest rates to be lower too, because it’s seen as less of a risky lending scenario on behalf of the lender.

But still, in both loan types, you’ll need to provide a detailed plan on how you’ll be able to pay your debts within a specific timeframe.

Bridging Loan Requirements

Before you decide whether to opt for a bridging loan or a mortgage, you should have a basic understanding of bridging loan eligibility requirements.

Every lender is different and has their specific bridging loan criteria. But don’t worry; there is a standard set of criteria that most lenders follow. Let’s take a closer look at these:

1. Solid Exit Strategy

As we previously mentioned, a bridging loan is short-term, and lenders often expect their borrowers to pay them back within weeks, months, or a few years at most.

So it’s normal for lenders to demand a solid exit strategy as proof that the lender will have access to long-term finances within an agreed timeframe to pay off the loan.

There’s no one definition for a solid exit strategy because you can generate funds from different sources. That includes selling your property, getting or refinancing a mortgage, cash redemption, and property flipping.

We strongly recommend you have a firm exit strategy because it won’t only help you get the short-term funds you need, but it’ll also help you secure better bridging loan deals with lower interest rates.

2. Security

When you apply for a bridging loan, you’re basically using your property as collateral for the loan. That’s why lenders often demand a certain amount of home equity in your current property and the property you wish to buy.

In other words, if you fail to repay your debts in time, your lender has the right to possess these properties. That way, lenders can ensure they take low to zero risks lending you money because they’re guaranteed to receive their money back if you fail to repay.

Some lenders will accept collateral assets other than properties, which include secured credit cards, cars, and personal savings.

3. Creditworthiness

Credit history is a crucial aspect of mortgages and loans, but it’s less significant in this type of loan.

Your creditworthiness is measured by evaluating your credit history and financial stability; people with high credit scores and steady incomes are much more likely to get better deals on loans and mortgages.

So Is A Good Credit Score Necessary To Get A Bridging Loan?

Well, it depends on the lender, but generally speaking, most lenders don’t pay much attention to credit score when it comes to bridging loans. Why?

Because arrangement fees and interest payments highly contribute to your loan. Moreover, unlike other mortgage types, you’re not required to make any monthly payments in bridging loans.

In most cases, lenders give huge attention to your solid exit strategy before giving you a bridging loan. A strong exit strategy is usually more than enough to prove that you’ll be able to pay your debts in time.

However, having a decent credit score before applying for a bridging loan is still preferable. That’s because you’ll likely get better deals and lower interest rates. But what happens if I don’t have a good credit score

You can still qualify for a bridging loan if you have adverse credit, but that highly depends on the lenders. If your credit score isn’t high enough, you may struggle to find a lender. But When The Bank Says No can help you find a bridging loan lender in most circumstances, including if you have:

  • County court judgments (CCJs)
  • Repossessions
  • Declared bankruptcy
  • Individual voluntary agreements (IVAs)
  • Arrears
  • Statutory Demands
  • Winding up orders

4. Loan Term

As short-term loans, bridging loans are often limited to 12 months at most. However, some lenders offer bridging loans for up to 18 and even 36 months. Unfortunately, it’s not common to find lenders with such flexible repayment dates.

Most bridging loans are limited to 12 months because they’re regulated by the Financial Conduct Authority (FCA), which regulates the UK market to promote competition and maintain the industry’s integrity while keeping the customers safe.

It’s important to note that the FCA doesn’t regulate ALL bridging loans on the market – including longer term 18 and 36 month bridging loans.

5. Deposit 

The deposit requirement significantly varies among lenders. But in general, most lenders who offer bridging loans demand at least 25% to 40% of equity as a deposit.

The higher the deposit, the lower the loan to value (LTV) ratio you get. That’s because a big deposit size proves that you’re not a high-risk borrower, allowing you to get access to bigger loans.

Regarding bridge loans, most lenders have a maximum LTV ratio of around 70 to 75%. You must have around 40% deposit if you want the best rates.

6. Proof of Income

Unsurprisingly, proof of income is a standard practice in mortgages and commercial loans. However, it’s not too common in bridging loans. Most bridging loans depend on the exit strategy, which is most likely the sale of a property.

That means, as a borrower, you’ll be cleared of your debts when you sell your old house. But in some cases, the property sale isn’t the only exit strategy. Some borrowers opt for remortgaging, refinancing, inheritances, or personal assets. 

In such cases, lenders often demand detailed evidence of income to see that you are financially stable enough to pay your debts, regardless of your exit strategy, so they can be reassured that you can afford some form of repayment if the worst should come to worst.

 

7. State of the Property

One of the reasons people opt for bridging loans instead of regular mortgages is that bridging loans are often more flexible in terms of evaluating properties.

For example, in other mortgage types, lenders might refuse some properties if they’re in poor condition or require many renovations and repairs.

On the other hand, bridging lenders accept most properties, even if they need significant repairs. Remember that properties in a bad state or requiring intensive maintenance may result in higher interest rates.

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Bridging Finance FAQs

Is there a minimum deposit for bridging loans?

When applying for a bridging loan, many factors affect the deposit amount, such as how much you want to borrow, the LTV ratio, and the value of the property you’re buying.

While every lender is different, most bridging lenders will require a deposit of at least 20% to 25%.

How much does a bridging loan cost?

The total cost of your loan will vary significantly because it depends on many factors. You’ll need to consider the reason you want the loan, interest rates, loan terms, personal finances, and more.

Additionally, there are some additional fees to consider when calculating the overall cost of your bridging loan, such as:

  • Exit fees
  • Arrangement fees
  • Legal fees
  • Redemption fees
  • Valuation fees

Is there a limit on how much I can borrow on a bridging loan?

The short answer is no. With this type of loan, there’s usually no upper limit on how much you can borrow as long as you meet the required criteria of your lender.

However, there’s usually a lower limit, which is set by the lender. For example, personal bridging loans loans start at around £10,000, residential bridging loans at around £50,000, while commercial bridging loans have much higher starting rates at around £500,000 and more.

Bridging Loan Eligibility Criteria Summary

While mortgage lending criteria might be complex, bridging loans are much more flexible and feasible for many home buyers. Whether you want to finance the purchase of your dream home, downsize your current property, or fund a property development, bridging loans might be your ideal option.

Due to the unpredictable state of the UK mortgage market, the eligibility criteria significantly vary among bridging loan lenders. But in general, you should expect the loan requirements to fall within the mentioned criteria.

And if you want to stay up to date with the latest changes, work with When The Bank Says No to help you find the best possible loan deals for you whether it is for a residential or commercial property. 

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Emma Jones
Emma Jones
Emma began her career in Lloyds Banking Group, first in the unsecured & secured loans department at Halifax and later as a mortgage advisor at Lloyds. During 9 years in these roles and a further 2 years at Yorkshire Building Society, Emma was able to observe the impact of the recession, and how the banks let their customers down by denying loans and mortgages. Wanting to be a driving force for change, she stepped into a market advice role where she has been able to help clients when others couldn’t. Identifying a gap in the mortgage space, Emma went on to establish When the Bank Says No. As a keen property investor, she has been the focus of features in publications including The Sunday Times and This is Money. Emma’s greatest joy is overcoming the low expectations of their customers, many of whom have all but given up on getting a mortgage due. One thing Emma has learned through her own personal struggles is every client must be treated like a human and understood better by advisors and lenders in the industry. “We all have to navigate life events which can ultimately impact your financial status. It shouldn’t mean dreams of homeownership or business growth should have the breaks applied”. Emma and her team’s passion for helping people overcome the challenges they may face when applying for a mortgage have fuelled the success of When the Bank Says No.

Our Customers rate us 4.6 out of 5

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