Do you qualify for a bridging loan? Understanding bridging loans is crucial to ensuring you get the financing needed to get your project off the ground. Whether you’re an investor, a developer, or a business, bridging loans provide short-term financing to help you realise your vision.
The fast, flexible nature of bridging loans has resulted in £831 million in bridging loans transacted in 2023, a 16% year-on-year increase. Let’s discuss the eligibility criteria you must meet to qualify for these types of loans.
Who is eligible for a bridging loan?
Technically, anybody with a feasible plan and sufficient capital to fund a deposit is eligible for a bridging loan. The UK bridging loan market is extremely open, which is why over 60% of industry figures predict further annual growth in the year ahead.
Unlike traditional mortgages, bridging loans can be obtained whether you have bad credit or have minimal experience. Granted, you’re unlikely to get favourable terms in this scenario, but a feasible project overcomes any other drawback in your application.
What can a bridging loan be used for?
Bridging loans have a variety of uses, making them a valuable tool regardless of where you are in your journey. Some of the most common uses in the property market include:
· Closing Fast – Bridging loans can be arranged in as few as three days, enabling you to quickly take advantage of prime opportunities.
· Property Chains – Are you concerned about a broken property chain? Nearly one in five bridging loans are used to prevent the collapse of property chains.
· Auction Purchases – UK auction houses require purchases to be completed within 28 days, making bridging loans ideal for when you don’t have sufficient liquidity.
· Refurbishment – Bridging loans can be used for quick refurbishments, lending themselves to “fix-and-flip” business models.
· Uninhabitable Properties – If you have an uninhabitable property that doesn’t qualify for traditional mortgages, bridging loans are the perfect alternative.
· Expansion – Expand your property portfolio quickly with purchases and renovations to enable your business to grow.
· Exit Finance – Struggling to pay off another loan, such as a development loan? Bridging loans enables you to exit existing loan agreements without defaulting.
But these aren’t the only uses for bridging loans. Some developers use it to purchase land without planning permission, secure brownfield sites, and secure commercial premises.
Bridging loan eligibility criteria
Qualifying for a bridging loan means meeting a lender’s criteria. Every lender has their own criteria, but there are many similarities across lenders. Let’s begin with the basic criteria you must meet to get your application approved.
- Age – All borrowers must be at least 18 years old. Some lenders may also have maximum age limits in place.
- Residency – UK residents or UK nationals residing abroad.
- Employment Status – You can be employed, self-employed, or retired.
- Legal Entity – Individuals and corporate entities of all types are welcome to apply.
Most applicants automatically meet these requirements simply by living in the UK. However, lenders also have financial and other requirements. Again, each lender will have its own set of ideal borrower criteria.
- Loan Term – Bridging loans have maximum terms of 24 months, with average terms of 12 to 18 months.
- Experience – Whilst not necessary, experience is always a plus point for any application. Some lenders may only work with experienced operators.
- Exit Strategy – Your exit strategy outlines how you will repay the money.
- Security – Provide a high-value asset, such as a property, as collateral for your loan.
- Minimum Loan – Most lenders have a minimum loan amount. This is often as high as £100,000, but it can be as low as £25,000.
- Credit History – Credit scores don’t have the same influence as applying for a traditional mortgage. However, a great credit history will help you secure the best rates. All lenders carry out checks as standard.
- Deposit – Bridging loan providers offer loans of up to 75% gross loan-to-value. However, if you’re willing to put down at least a 40% deposit, you’ll get better rates.
- Proof of Income – This isn’t a primary requirement like with other loans, but it helps to show that you’re a strong candidate.
What are the most important criteria for bridging loan lenders?
The most important criteria are showing that you’ve got a viable project and an exit strategy to match. Ultimately, lenders don’t care about the success of your venture. All they care about is that you’ve got an exit strategy with a high chance of success because this is how you’re going to repay the money.
The most successful exit strategies go down two paths:
1. Sales – Most developers choose to sell the property they’re securing their bridging loan against. When they sell the property, the proceeds will be used to repay the bridging loan plus interest.
2. Refinancing – Refinancing is ideal if you want to keep the property on your books. Essentially, refinancing means taking out another loan and replacing your bridging loan.
Do bridging loan lenders check credit scores?
Yes, all bridging loan lenders run credit checks as standard. You’ll be hard-pressed to find a lender who doesn’t because your creditworthiness is a factor in your application.
However, just because you’ve got a poor credit history doesn’t mean you won’t get approved for a bridging loan. Since this is a secured loan that you don’t make regular monthly repayments on, it’s rare for a lender to decline your loan on this basis alone.
On the other hand, your credit rating will influence the terms and rates a lender offers you. High credit scores could save you thousands of pounds over the course of your loan.
What other factors can affect your eligibility for a bridging loan?
Bridging loans hinge upon the strength of your project. The lender always has leverage because they’ll have a charge on the property you’re buying or developing. Plus, some borrowers might even put up other assets as collateral to get better rates.
The key to any application is providing a professional presentation of what you want to do and why this translates into a successful exit strategy. Some of the factors within your application lenders will want to see include:
· Construction cost breakdown
· Developer portfolio
· Detailed timelines
· Team breakdown
· Local market research
Showing that you’ve covered all the bases during your research is always going to make a prospective lender feel more comfortable about lending you money. But how do you know if you’ve got an excellent presentation?
Working with a broker like Hilton Smythe enables you to partner with a bridging loan expert who can review your application and provide bespoke advice on tailoring it to the current UK lending market. If you’re ready to start searching for bridging loans, speak to the team today.
