Bridge loans for bad credit (A 3 point guide)
In this brief blog, we will cover if you can get a bridge loan for bad credit. Getting a bridge loan for bad credit is, of course, possible but it will depend on the type of bad credit and your personal circumstances.
You may have gotten yourself into some financial mess in the past and as a result of this ended up with bad credit. Can this bad credit now stop you from getting a bridging loan after so many years have passed?
Or maybe you had some bad credit in the past but now have a good income and have been building credit ever since. Will this affect your bridge loan application?
What is a bridge loan?
A bridge loan is a short term secured loan which is secured on an asset such as a house. A bridge loan is usually given for 12 months but can be given for as long as 36 months.
Bridge loans are interest-only loans, almost like interest-only mortgages this means you will only have to repay the interest element of the bridge loan and the capital borrowed will be repaid at the end of the bridge loan term.
Bridge loans don’t have a maximum amount they will provide but much like mortgages, they are offered based on the value of the asset they are lending on. A bridge loan will usually have a loan to value of about 75% meaning you will have to put a mortgage deposit of about 25% down.
Bridge loans will usually have higher interest rates than mortgages and you will have to pay the legal fees, valuation fees and any bridge loan arrangement fees.
Types of Bridge loans
A bridging loan can be either closed or open. A closed bridging loan has a set repayment date, while an open bridge loan doesn’t, though payment is expected before the loan period runs out. There will usually be no early repayment fees.
When do you need a bridge loan?
Bridge loans are fast loans which you can use to bridge different gaps such as the time it takes for someone to buy your house when you are buying another property. In this instance, you could use a bridge loan to purchase your new home and as soon as your current house sells you could then use the funds received from there to remortgage your bridge loan on to a better residential mortgage.
Without a bridge loan, you may have missed out on your new home purchase as you may not have met the mortgage affordability requirements for another mortgage because you had to continue making monthly mortgage repayments on your current property.
Bridge loans are made for these particular scenarios and will more often than not be able to lend to you in this case but can you get a bridge loan with bad credit?]
How is interest charged on bridge loans?
Interest on bridge loans is charged in 3 ways
Just like an interest-only mortgage, you pay off the interest each month and the capital borrowed at the end of the term with your repayment vehicle.
There are no monthly interest payments, interest is compounded and added to the capital borrowed. Everything is then paid off at the end of the bridge loan term with your repayment vehicle.
You ‘borrow’ the interest as well as the loan amount. The total amount payable is calculated at the beginning of the term, based on how long the term is and everything is payable at the end with your Bridge loan repayment vehicle.
Can you get a bridge loan with bad credit?
In most cases, you will be able to get a bridge loan with bad credit.
There are several factors which will affect your chances of getting a bridge loan with bad credit and tackling each one of them could improve your chances significantly.
The asset you use as security
The reason why it is much easier to get a bridge loan with bad credit than it may be with residential mortgages is that bridge loans are much more focussed on the asset you used to secure the bridge loan and because bridge loans are short term loans.
As far as the asset you used to secure the bridge loan will be sufficient in value for the bridge loan lender to recoup what they have lent to you then they are usually content in offering you a bridge loan with bad credit.
Your exit & repayment plan
Bridge loan lenders will also usually offer you a bridge loan with bad credit as long as you satisfy their requirements for a suitable bridge loan repayment method. If you are for example waiting on a property to sell before you remortgage from a bridge loan or you are doing some minor construction work before you remortgage to a bridge loan then you may find that there are bridge loan lenders who will lend to you with bad credit.
If on the other hand, you intend to buy land and then build a property which you hope to sell and then repay the bridge loan with the sale process then you may find that the bridge loan lender may not offer you a bridge loan with bad credit as the likelihood of you seeing everything to the end and getting the optimal result you envision may be diminished by several factors beyond your control.
If you plan to remortgage
If your exit plan for a bridge loan is also to remortgage your property then you may find it harder to get a bridge loan with bad credit as many bridge loan lenders will simply not lend to you. This is because they are fearful that any missed repayments on your bridge loan will further ruin your chances of getting a mortgage or that you may not be able to get a remortgage with your current bad credit.
Your experience as a developer
If you are also an experienced property developer and you are seeking a bridge loan with bad credit to develop some property then you may find that the bridge loan lenders are more willing to provide you with an offer based on your experience.
Your bridge loan deposit
Putting down a bigger bridge loan deposit could also go a long way to improving your chances of getting a bridge loan with bad credit. Most bridge loans will require a deposit of 25%. If you increase this up to 35% or even 40% then you may be able to get a bridge loan with bad credit. You should seek expert advice from your bridge loan broker on this matter.
Your property type
The type of property you want to get the bridge loan with bad credit for may be a huge factor in whether you are successful or not. Most lenders will prefer to secure loans on standard assets which they are certain they can repossess and sell without any loss of value. Most bridging loan lenders may therefore not offer a bridging loan with bad credit if your property type is a non-standard construction property.
If your property is also a commercial or unmortgageable property then this may even compound the issue further.
This is on a high-level basis, in reality, most bridge loan lenders will want to look at your bad credit on a case by case basis to further understand the type of bad credit you got yourself involved in and how this may end up affecting your ability to repay the bridge loan.
When considering bridge loans bad credit could include:
A debt management plan
A home reposession
Missed payments on credit agreements
Late payments on credit agreements
Missed mortgage payment
No credit score
Low credit score
If you are considering getting a bridge loan with bad credit then the bridge loan lender may insist you put down a larger deposit.
You can speak to a bridge loan broker who may be able to assist you in getting a bridge loan with bad credit.
Can bridging loans help improve your credit score?
Yes, bridge loans can help improve your credit score by making the monthly repayments on your bridging loan this could help you improve your credit score.
You may also want to consider building credit before you apply for a bridge loan as this may increase your chances of getting accepted for a bridge loan with bad credit.
Some of the things you can do to get accepted for a bridge loan with bad credit include:
You can improve your credit score by doing the below things but you should be aware that improving your credit score will take at least a few months.
Open a bank account or credit account
The simplest thing you can do to establish or improve your credit score is to open a bank account or any other credit account.
By opening a bank account you open an account which gets reported to the credit bureaus as an account on your credit report.
The longer you have this account open for the longer you will have a credit history. It usually takes 3 years from you opening an account which gets reported on your credit file before you will have any credit history which can be seen by others.
Opening a bank account also allows you to have an account on your credit file with a verified home address. This means it will be easier for you to access credit products in the future.
A bank account might also be the easiest way to a credit card as banks are more willing to offer credit cards to account holders as they can view your account history and see how credit worthy you are even if you have a low credit score.
Ask your bank for a small overdraft facility
To Build credit you need credit so one of the ways to improve your credit score or build credit is by having an overdraft. You then need to show good behaviour when you have access to this credit.
By asking your bank to give you an overdraft facility you will have a credit account open on your credit file which boosts your credit score.
You will also have the ability to use your available credit, sticking to the 30% maximum credit utilization golden rule per credit account and thereby showing good credit behaviour which should boost your credit score even further. Always repay your overdraft as soon as you can to avoid any fees.
Get a Household Utility in your name
Some utility accounts are now being reported on your credit file and having one in your name is a very good way to improve your credit score. This means that your payment history on your gas, electric and telephone service will affect your credit score.
By getting yourself named as the account holder on these services you can establish and improve your credit score if your bills are paid on time and there are no balances or defaults on the Utility account.
If you live in a shared accommodation be sure to avoid any disputes and get payment for utilities well in advance so as to avoid any of your house mates holding you hostage and ruining your credit file.
Do you live with your parents? Ask them to put your name, date of birth and address on the utility bill. This will open a new account on your credit file and ensure you begin to get credited for the regular payments being made on the account.
If payments are missed on the account this could negatively affect your credit score so you must ensure payments are not missed.
You can also simply get a cheap phone on contract. A £5/month contract will be achievable with little or no credit history as the risk of default is very low and making regular repayments to your phone contract will boost your credit file.
You should avoid applying for more expensive phones with no credit file or score as this could damage your credit score even further even though you don’t have one.
Not all utility providers report your payment history to the credit bureaus so you may want to inquire with the utility provider before opening an account.
Keep your credit utilization below 30%
Your credit utilization is one of the factors that affects your credit score. The golden rule is to use no more than 30% of your available credit. If you are currently using above this then reducing your credit utilization below this limit will help improve your credit score
Pay down your credit card balance & other debts
Credit card balances and credit debts are recorded on your credit file. These balances have a negative impact on your score(especially when your revolving debt is over 30% of your available revolving credit) as well as costing you in interest rate charges and fees.
Paying down your credit card balances, loan balances or any default you have on utility and credit accounts will help improve your credit score.
Paying your credit card balance in full each month
Making only the minimum payment on your credit card means you have an outstanding balance which is recorded on your credit file.This negatively influences your credit file. Paying your credit balance on time full in each month will help improve your credit score
Make your credit repayments on time
Missing credit repayments negatively impacts your credit score. Keeping up with your monthly credit repayments will see your credit score improve gradually.
Making your credit repayments on time will also ensure you avoid negative credit markers such as:
- County court judgments
- Missed repayments
Get on the electoral roll
The easiest way to improve your credit score is to register to vote as this data is recorded on the public register which the credit bureaus check and include in your credit file. This is the first way to prove your identity and by far the easiest.
In the future when you apply for credit or a credit check is done, this will be the basis of their verification method for you and helps make you seem more creditworthy. You should check with your local council here if you are already on the electoral roll and if not you can register to vote here.
If you are not eligible to vote in the UK you will not be able to get on the electoral roll. In this case you can get a similar benefit by submitting a document to either Experian, Equifax or callcredit proving your identity and address. You can then ask them in writing to confirm that they have verified your identity on your credit file
Get a credit builder card
To improve your credit score you could get a credit builder card. Credit Builder cards are similar to secured credit cards as they are targeted towards people with low or no credit scores.
Credit Builder cards do not require security deposits but as with secured credit cards they will have low credit limits and high APRs.
A student credit card will likely be available on the same terms as a credit builder card. The best place to get this might be from your bank as they will be more likely to approve you for this type of card due to already having an idea of your income and expenses.
Store credit cards are usually easy to get approved for too.There are also credit builder prepaid cards which charge a monthly fee which is then recorded on your credit file as repaying a debt. This helps you build your credit score.
Get a secured credit card
Secured credit cards can be used to improve your credit score as they allow you to show you can make credit repayments, they add to your available credit which will improve your score and they allow you to show a low credit utilization which will improve your credit score.
Getting approved for most credit cards will be difficult if you have a low credit score but a secured credit card can help you overcome this.
Secured credit cards will approve you if you pay a deposit as part of your secured credit card application.
This deposit is usually your credit limit or a percentage of your credit limit. Secured credit cards aren’t very common in the Uk.
Capital one was known to offer one and you should contact them to see if this is still available.
You should be aware that secured credit cards will have low credit limits and high APRs. This can lead you to fall into serious debt if you fail to keep up your monthly credit repayments.
Get a credit builder loan
Another way to improve your credit score is by using a credit builder loan.
Credit Builder loans, just as they sound, help you build credit. The idea is you take out a loan but rather than receiving the loan funds these are deposited in an account(usually to earn interest) and you make repayments to the loan provider every month.
As you make these loan repayments on time your credit file records this and your credit score improves. At the end of the loan term you get all your loan repayments and whatever interest you have gained.
Loqbox is a credit builder loan provider in the UK.
Get a cosigner for a credit card or loan or become an authorised user
If you can’t get a credit builder loan, credit builder card or secured credit card then your next bet to help you improve your credit score will be to get yourself a cosigner on a credit card or loan.
You should really only do this if you are likely to repay your credit cards or loans on time and in full every month.
If you fail to make your credit card repayments on time then this may affect your co signer’s credit score too. If you make these repayments on time your credit score will rise and the payments will be registered on your credit file for at least 6 years.
Getting a cosigner on a credit card or loan creates a financial relationship between yourselves. This means any negative behaviour from them might affect your credit score negatively and vice versa.
A cosigner essentially allows you to qualify for credit and in some cases cheaper credit. A cosigner will also be legally responsible for any debt owed on the account if you default.
Another way to help improve your credit score is by becoming an authorised user on someone else’s credit card.
The difference between authorised users and cosigners isn’t that much. Becoming an authorised user on someone else’s credit card will help you improve your credit score if the main card holder makes all their repayments in full and on time each month as well as keeping their credit balance low.
some credit card companies might not take you into account and may not collect this data and hence report it on your credit report.
You should contact the credit card company asking them to report the fact that you are an authorised user on the credit card to the credit bureaus.
Becoming an authorised user does not give you any liability, so if the main card holder defaults you won’t be held liable but it does affect your credit score if the account is mismanaged or goes into default.
Keep your credit accounts open as long as possible
Closing credit accounts can negatively impact your credit score as this reduces the number of accounts with a credit history. This is especially worse if the credit account you close is one with a long history. The account will no longer be open and will therefore not count towards the majority of your credit score.
Unused credit accounts which don’t have long histories can be closed as they do not add to your credit score. Having access to too much unused credit may also be seen as negative.
Avoid payday loans
Most lenders look down on payday loans as they view people who take out these loans to be desperate and hence financially irresponsible.
Paydayloans will therefore have a negative influence on your credit file and you should avoid them.
Avoid making too many credit applications
Making applications for utility or credit can reduce your credit score. This is because everytime a utility or credit provider is about to open a new account they will do a hard credit search. You should only apply for credit or utility which you are pre-approved for. If you make multiple credit applications then multiple hard credit searches will be done on your credit file.
This means your credit score will go lower as the credit bureau will view too many credit applications as you being desperate. If you stop making blind credit applications then your credit score will likely improve.
You should always use an eligibility checker to see if you will be approved for credit or utility accounts before you apply. These checks are done with soft credit searches which only you can see.
Report your rent to the credit bureau
Another way to improve your credit score is by reporting your rental payments to the credit bureaus.
If you currently pay rent or paid rent within the last 3 years you will be able to report your rental payments to the credit bureau and this will be an account on your credit file showing your payment history.
Paying your rent on time will ofcourse improve your credit score whilst missed payments will reduce your credit score. The scheme is known as the rental exchange scheme and is currently only being offered via Experian.
Increase your available credit limit
Increasing your credit limit will reflect on your credit file and improve your credit score as it shows lenders are willing to trust you with more money as well as reducing your current credit utilization (how much you spend in relation to how much credit you have available. The golden rule is a maximum of 30%).
You can ask your current card provider to increase your credit limit or let you know if you will be eligible for a credit limit. Also ask if they intend to run a hard credit search on you and do not consent to this unless they will pre-approve you for a credit limit increase.
Open a new credit card account
Opening a new credit account will be your next option if your current credit card provider will not increase your credit limit. You essentially accomplish the same things as your available credit limit increases.
You must repay your balances on your credit card account every month and avoid using over 30% of your available credit. This is a good option if you want to improve your credit score.
Have a good credit mix
Mix things up a little by having a varying degree of accounts on your credit file. Like your partner, credit bureaus like to see you mix things up a little bit. By this, we mean that a proportion of your credit score is ranked by how diverse the different types of credit you have been utilizing is.
Revolving accounts (i.e. credit cards, store cards)
Installment accounts (i.e. home equity line of credit, auto loans)
Open accounts (utility accounts)
Increase your variety and your credit score will increase.
Ensure your registered address is the same on all your credit accounts
Any active accounts on your credit file should display your correct address. You can check the addresses on your accounts by viewing your credit file. Make sure all active accounts list your current address. This may improve your current credit score.
Check your credit score regularly
Checking your credit score regularly is one of the ways to ensure that the information on your credit score is indeed up to date.
It also informs you on what your credit score is and this allows you to have an idea of which credit providers may lend to you.
If you find any errors on your credit score or report you can contact all of the credit bureaus or the specific credit bureau where the error is mentioned and ask them to make the necessary corrections.
The credit bureaus will check and investigate the matter but in the meantime put a notice of correction on the record entry so that any third parties who are checking your credit score will be aware that the entry may be incorrect.
The credit bureau will usually let you know the outcome of their investigations within 28 days.
If you are unsure of what your credit score is then you should check your credit score from the four credit bureaus in the UK: Experian, Crediva, Equifax and Transunion.
Some of these credit bureaus may charge you a fee to view your credit report so what you can alternatively do is request a statutory credit report which is a free credit report which each credit bureau must provide to you upon you requesting it.
Alternatively, you can also use credit score services such as Checkmyfile and clearscore to check your credit report.
Remove negative financial links
You should check your credit file for financial links that you don’t recognise. Some financial links can reduce your credit file as this might mean your credit score is going down due to someone else’s bad credit behaviour.
Any financial links which seem out of the blue can be removed from your credit file. Financial links can be generated by just sharing apartments with someone else, getting a loan with someone else etc. You should ask the credit bureaus to correct this.As you remove these negative financial links your credit score should improve.
How to get a bridge loan with bad credit?
If you want to get a bridge loan with bad credit then you may want to consider seeking the help of a bridge loan broker who has some experience with bad credit or alternatively seek the help of a bad credit mortgage broker who has some experience with bridge loans.
The mortgage broker will advise you on what may be needed for you to get a bridge loan, any necessary documents or explanatory notes you may need to include in your bad credit bridge loan application.
The mortgage broker may also advise you that you need to put down further collateral to make the loan more secure for the bridge loan lender due to your bad credit.
This could be jewellery which has been appraised, shares in a business, other property, a car etc.
The mortgage broker will also advise you on the strength of your existing strategy and advice you on if they believe you should seek an alternative exit strategy to increase the likelihood of you getting a bridge loan with bad credit..
Can you get a bridge loan with no credit check?
No, you can’t get a bridge loan with no credit check as with most lenders who lend on a secured asset a credit check is important and we haven’t heard of a bridge loan lender who doesn’t perform a credit check.
It is very likely the bridge loan lender will perform a credit check. You can beat them to it by checking your credit score for all four credit bureaus (including Crediva) through checkmyfile.
Bad credit bridge loans for businesses
Businesses also have credit scores which can be checked by checking the credit bureau. If a business has a bad credit score and history then they may need specialist mortgage advice to get a bridge loan for a business with bad credit.
As a limited company, the bridge loan lender may want personal guarantees from the directors and if your company is an SPV you may find the number of bridge lenders available to you with a company with bad credit may increase.
Are bridging loans regulated?
Bridging loans can either be regulated or unregulated. Regulated bridging loans are those that have to do with residential purchases while unregulated bridging loans are those for commercial purposes and buy to let.
What is the minimum I can borrow with a bridging loan?
Bridging loan lenders have a variety of bridging loan minimum borrowing amounts. You may be able to borrow £50k, £30k or even £10k with some as a minimum amount.
Can you get a bridge to let agreement with bad credit?
Yes, you may be able to get a bridge to let with bad credit with some specialist bridge loan lenders. Some lenders will be able to provide both the bridge loan and the buy to let mortgage you will need later on. This is also known as a bridge to let agreement, and will usually involve getting an agreement in principle for the buy to let mortgage when the loan funds are due to be released.
Non-status bridge loans are where you get a bridge loan at an interest rate that is much higher than usual. The bridge loan lender will pay little time to the borrower but rather to the asset and specifics of the loan. A non-status bridge loan could be good for you if you have little income but a lot of assets which you can put as collateral.
If you are considering getting a non-status bridge loan then you may want to speak to a mortgage broker who may be able to assess your lending options in more detail.
Can you get a second charge bridging loan with bad credit?
Getting a bridge loan with bad credit may be difficult as many bridge loan lenders will see the chances of you defaulting as being very high and the interest rates charged on 2nd charge bridge loans may be unaffordable.
A 2nd charge bridge loan also means the lender will be 2nd in line to claim any proceeds from the property should you default and the property is repossessed.
You may be able to get a 2nd charge bridge loan by speaking to a bridge loan broker
Can you get a third charge bridging loan with bad credit?
Getting a 3rd charge bridge loan may be almost impossible but there are many specialist bridge lenders out there that just may be willing to lend to you. Your bad credit may, however, complicate issues further and make the 3rd charge bridge loan unaffordable due to their high interest rates or unrealistic.
You should speak with a bridge loan broker who may be able to analyse your options or a 3rd charge bridge loan with bad credit.
If you need financial advice and you live in the UK then you could contact the Money Advice service over the phone or via chat for impartial advice.
You can also contact the debt charity “Step Change” if you are in debt and need help.