Bridging Loan Eligibility Criteria: What do You Need to Apply?
Many lenders have bridging loan eligibility criteria that you’ll need to meet to qualify for a loan. Read on to find out what they’re looking for to make your application as smooth as possible.
A bridging loan can be used for various different commercial or residential reasons, for example, if you are buying and selling a house at the same time, and you need a loan to bridge the gap between the two transactions.
Understanding the criteria lenders use to assess bridging loan applications could help improve your chances of being accepted for finance.
Here, we run through some of the most common bridging loan eligibility criteria lenders evaluate.
Security for the loan
Bridging loans are a type of secured loan, which means that you’ll need to put down a physical asset when applying for finance. Lenders typically ask for one or several properties to be used as collateral when you apply for a bridging loan. If you are unable to repay the bridging loan, the lender has the right to repossess the property or properties put down as security.
» MORE: What is a bridging loan?
Your exit strategy
An exit strategy is your ability to repay your bridging loan. Your exit strategy is a key part of the bridging loan eligibility criteria because it shows lenders how you plan to pay off the loan. There are several types of bridging loan exit strategies, including:
- Selling the property: Once the property is sold, the proceeds will be used to pay off the loan.
- Refinancing: Switching to a traditional mortgage or specialist property loan and using some of the cash to pay off your bridging loan.
- Cash redemption: Using future funds to pay off your bridging loan – for example, using money left as inheritance.
- Property flipping: When you intend to buy a property, renovate it and sell if for a profit.
- Development: When you purchase a large residential property development with the intention of selling or renting out each unit.
Most lenders require a minimum loan size of £10,000 for a bridging loan, though some may ask for more. However, lenders don’t tend to have an upper limit on how much you can borrow for a bridging loan.
Bridging loans are intended to be a short-term borrowing method. Residential bridging loans are regulated by the Financial Conduct Authority (FCA) and are limited to 12 months. However, some lenders offer bridging loan terms of up to 18 or even 36 months – though bear in mind that the FCA will not regulate loans with terms of more than 12 months.
It’s also worth noting that the FCA does not regulate buy-to-let and commercial bridging loans.
Lenders usually consider a wide range of property types for a residential bridging loan. These include but are not limited to:
- mixed-use of properties
- parking spaces
- holiday homes
On top of the above, commercial or buy-to-let bridging loans may also be used to finance:
- health clubs
A good credit history could help improve your chances of being accepted for a bridging loan. However, some lenders have flexible criteria which means that you may still qualify if you have bad credit. Some lenders may still accept applications if you have:
- county court judgments (CCJs)
- individual voluntary agreements (IVAs)
- declared bankruptcy
Many lenders require a minimum deposit of 25% to 30% for a bridging loan. Similarly with mortgages, you can unlock more favourable interest rates with a larger deposit. Typically, the lowest rates for a bridging loan can kick in with a deposit of around 40%.
Bridging loans are generally reserved for residents and companies based in the UK. Most lenders cover the following locations:
- London (including within M25)
- Northern Ireland
Some lenders may also extend to locations in Europe and the USA.
Applicants must be 18 years old to apply for a bridging loan. The maximum age limit for a bridging loan varies between lenders. While some may have a maximum age requirement, others have no limit and offer bridging loans for buyers aged 70 and over.
Proof of income
Unlike with mortgages, proof of income isn’t generally an important factor for lenders when assessing a bridging loan application. This is because you’ll need to have a good exit strategy to prove how you will pay off the loan.
What do you plan to use the bridging loan for?
Lenders will require a reason for why you need a bridging loan. You might apply for a bridging loan if you are:
- buying a property before the current one is sold
- successfully bidding for a property at auction
- buying a property in a poor condition that you plan to sell on or renovate
- financing renovation or other building work
There are many other factors lenders may consider as part of their bridging loan eligibility criteria. These include but are not limited to:
- the condition of the purchase property
- your experience in property
- your employment status
- minimum turnover
WARNING: Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on a loan or any other debt secured on it.
Always check whether a bridging loan is regulated or not. To protect consumers, bridging loans on residential properties must be regulated by the Financial Conduct Authority. Bridging loans on buy-to-let, commercial and investment properties can be unregulated.
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Brean is a personal finance writer at NerdWallet. She covers a range of financial topics and has written for consumer titles including Which?, Moneywise and The Motley Fool. Read more