How to Get a Bridging Loan with Bad Credit
If you are looking for a short-term loan to buy a new home before selling your current one, you may have heard of bridging loans. Bridging loans are designed to help you bridge the gap between two properties when you need some extra cash. But what if you have a bad credit history? Can you still get a bridging loan? The answer is yes, but it may not be easy. Right in this blog post, I will explain what bridging loans are, how they work, and how you can get one even if you have a bad credit history.
What are bridging loans?
Bridging loans are a type of secured loan that you can use to buy a new property before selling your existing one. They are usually for a short period of time, ranging from a few weeks to a few months. They are also usually for a large amount of money, depending on the value of your property and the equity you have in it.
Bridging loans are different from regular mortgages in several ways. First, they have higher interest rates and fees, because they are riskier for the lender. Second, they are not regulated by the Financial Conduct Authority (FCA), which means they have less consumer protection and more flexibility for the lender. Third, they are usually interest-only, which means you only pay the interest each month and repay the principal at the end of the term.
Bridging loans can be either open or closed. An open bridging loan has no fixed repayment date, but you have to repay it within a certain period, usually 12 months. A closed bridging loan has a fixed repayment date, which is usually linked to the sale of your existing property. Closed bridging loans are less risky and cheaper than open bridging loans, but they are harder to get.
How do bridging loans work?
To get a bridging loan, you need to have a valuable property that you can use as security for the loan. You also need to have a clear exit strategy, which is how you plan to repay the loan. The most common exit strategy is to sell your existing property and use the proceeds to pay off the bridging loan. Alternatively, you can refinance the bridging loan with a long term mortgage once you have bought the new property.
The amount you can borrow with a bridging loan depends on the loan to value (LTV) ratio, which is the percentage of the property value that you can borrow. For example, if your property is worth £200,000 and the LTV is 70%, you can borrow up to £140,000. The LTV ratio varies depending on the lender and the type of property, but it is usually lower than a regular mortgage.
The interest rate and fees for a bridging loan also vary depending on the lender, the type of property, the term of the loan, and your credit history. Generally, the interest rate for a bridging loan is higher than a regular mortgage, ranging from 0.5% to 1.5% per month. The fees for a bridging loan may include an arrangement fee, a valuation fee, a legal fee, a broker fee, and an exit fee. The fees can add up to a significant amount, so you should compare different lenders and get a clear breakdown of the costs before you apply.
How to get a bridging loan with bad credit?
If you have a bad credit history, such as missed payments, defaults, CCJs, or bankruptcy, you may find it difficult to get a bridging loan. This is because lenders will see you as a high risk borrower and may reject your application or charge you a higher interest rate and fees. However, this does not mean that you cannot get a bridging loan at all. There are some lenders who are willing to lend to people with bad credit, as long as they have a valuable property and a viable exit strategy.
To get a bridging loan with bad credit, you need to do some research and find a lender who specializes in bad credit bridging loans. You can use online comparison sites, such as Lending Expert or Crystal Bridging Loans, to find lenders who offer bad credit bridging loans and compare their rates and fees. You can also use a broker, such as EasyKnock or Bridging Loan Directory, to help you find the best deal and guide you through the application process. A broker can also negotiate with the lender on your behalf and increase your chances of approval.
When you apply for a bridging loan with bad credit, you need to provide some documents and information to the lender, such as:
- Proof of identity and address
- Proof of income and expenditure
- Details of your existing property and the new property
- Details of your existing mortgage and the bridging loan
- Details of your exit strategy and the expected sale price of your existing property
- Details of your credit history and any adverse events
The lender will use this information to assess your affordability and suitability for the bridging loan. They will also conduct a valuation of your property and a credit check. The valuation will determine the LTV ratio and the amount you can borrow. The credit check will show your credit score and any negative marks on your credit file. The lender will then decide whether to approve or decline your application, or offer you a conditional offer with some terms and conditions.
If your application is approved, you will receive a formal offer from the lender, which will include the interest rate, fees, term, and repayment schedule of the bridging loan. You should read the offer carefully and make sure you understand the terms and conditions before you accept it. You should also seek independent legal and financial advice before you sign the contract. Once you sign the contract, the lender will transfer the funds to your account or your solicitor’s account, and you can use the money to buy the new property.
What are the risks and benefits of a bridging loan with bad credit?
A bridging loan with bad credit can be a useful option for home buyers who need some extra cash to buy a new property before selling their existing one. However, it also comes with some risks and benefits that you should consider before you apply. Here are some of the main pros and cons of a bridging loan with bad credit:
- You can buy a new property without waiting for the sale of your existing one, which can save you time and hassle.
- You can avoid losing your dream home to another buyer, or missing out on a good deal or a bargain.
- You can avoid breaking the property chain, which can cause delays and complications for you and other buyers and sellers.
- You can improve your credit score by repaying the bridging loan on time and in full, which can help you get a better deal on a long-term mortgage in the future.
- You can choose from a range of lenders who offer bad credit bridging loans, and compare their rates and fees to find the best deal for you.
- You have to pay a higher interest rate and fees than a regular mortgage, which can make the bridging loan very expensive and increase your debt.
- You have to repay the bridging loan within a short period of time, usually 12 months or less, which can put pressure on you and your finances.
- You have to sell your existing property or refinance the bridging loan with a long term mortgage, which may not be easy or possible if the market conditions change or your circumstances worsen.
- You risk losing your property if you fail to repay the bridging loan, as the lender can repossess it and sell it to recover their money.
- You have less consumer protection and regulation than a regular mortgage, as bridging loans are not regulated by the FCA, which means you have fewer rights and remedies if something goes wrong.
Bridging loans are a type of short-term loan that you can use to buy a new property before selling your existing one. They can be a helpful solution for home buyers who need some extra cash and do not want to miss out on their dream home. However, they can also be very costly and risky, especially if you have a bad credit history. Therefore, you should weigh the pros and cons carefully and do your research before you apply for a bridging loan with bad credit. You should also seek professional advice from a broker, a solicitor, and a financial adviser to make sure you get the best deal and avoid any pitfalls.