Bridging loans are an increasingly popular form of finance, with a series of key advantages behind their increase in use. This increase is most predominant amongst commercial and residential property buyers for reasons we will delve into later.

Despite this increase in use, it is still the case that many would-be borrowers looking for finance aren’t aware of bridging loan requirements and how they work, even if they’ve heard of them before. In this article, we’ll be covering these two topics, outlining the benefits of bridging loans, and ensuring you can make an informed decision.

What is a bridging loan?

Bridging loans are a form of finance that prizes speed and accessibility as its two main draws. Bridging loans are short-term in nature, lasting less than a year on average, and boast a speedy application process. It is not uncommon for borrowers to have their application processed, approved, and have cash in their account all within days, making bridging loans an excellent tool for property buyers of any stripe.

In addition to speed, bridging loans can be used to raise a large sum of capital. This is because bridging loans fall under the category of secured loan, meaning they require physical assets to be used as collateral in the loan agreement. While this greatly quickens the application process, as less time is spent on vetting credit information, it also makes bridging loans extremely flexible indeed. If you have assets of sufficient value, and can find a willing lender, it is perfectly possible to raise millions using this form of finance.

However, this convenience does come with additional risk. Lenders will place a lien on property used as collateral, which entitles them to seize it as a form of repayment if the borrower defaults for any reason. To mitigate this risk, most borrowers will use bridging loans as an in-between; they will use the loan to purchase an asset, then either sell a previous asset, such as property, to pay back the loan, or secure a long-term form of finance.

Who offers bridging loans?

As we mentioned, bridging loans are a short-term and comparatively risky form of finance. This, and a few other reasons, make it a markedly different loan compared to a traditional loan. As such, most banks, credit unions, and other traditional lenders will not offer bridging loans in any way. Instead, you will have to look to private lenders for a bridging loan. While this may seem difficult, there are many safe and trustworthy lending hubs online. These hubs essentially work to bring private bridging loan lenders and borrowers together, while offering a layer of security that oversees any agreements or transactions that take place. Alternatively, you could look to hard money lenders instead.

Bridging loan requirements

To be eligible for a bridging loan, you must first meet several requirements. While these requirements are similar to other kinds of finance, there are key differences in certain areas. If you are considering applying for a bridging loan, you should first check to see if you meet the following:

Valuable assets and equity

As bridging loans are classified as secured loans, it’s no surprise that the value of assets to be used as collateral is the most important factor during an application. If you don’t have valuable assets, nor equity in any assets, then your odds of getting a bridging loan are slim to none.

The precise requirement depends on how much you are applying for and your chosen lender. Naturally, the more money you’re asking for, the more valuable your collateral assets have to be. That said, some lenders will allow for more wiggle room than others. Broadly speaking, most bridging loan lenders will expect borrowers to provide a deposit of 20-30%, while they will cover the rest. However, some lenders will expect a lower or higher deposit, depending on their policy.

Proof of income

The next major requirement is proof of income, and a stable one at that. While not as important as the previous requirement, lenders will want to know that you have the means to make monthly repayments, and cover the costs of property maintenance should that be necessary. It’s worth noting that commercial ventures are subject to more scrutiny than residential property purchases, with some lenders wanting to see a business plan and an idea of what income the property will generate once on the market. Needless to say, more is better.

Credit score

While credit score isn’t a dealbreaker for bridging loans, unlike other forms of finance, it does have some impact during an application. Specifically, your credit score will impact what interest rates you can expect to pay, and what products you may choose from. A high credit score will keep most or all options open, with interest payments being quite competitive. However, a low credit score will result in the opposite, closing some doors and raising your interest payments.

Why use a bridging loan?

There are many reasons to use a bridging loan, with the advantages being most notable for borrowers looking to purchase property. Here are some of the most notable:

  • Speed – The biggest advantage to using a bridging loan is speed. You won’t wait long for your application to be processed, so you’ll be able to pounce on your dream home when it appears. What’s more, you won’t have to wait for your old home to sell, completely removing the risk of a break in the chain.
  • Looks good to a seller – Making a cash offer to a seller looks perfect; it looks decisive, and there’s far less risk than accepting an offer from someone who must sell their old home first. With a bridging loan, you raise your chances of having your offer accepted.
  • Flexibility in making repayments – Depending on your lender, you can choose a variety of methods to make repayments. Some allow for interest-only payments, others factor interest into the amount due at the end, while others still won’t ask for interest if you repay the full total within a certain timeframe.

Wrapping up

All in all, a bridging loan is an incredible tool for property buyers. It’s fast, flexible, and allows you to seize an opportunity when it arises. Regardless of whether you use it for a commercial venture or a residential dwelling, a bridging loan can ensure you have the funds to make a purchase when you need to. However, it does come with some risk, making it essential to carefully consider your situation before taking action.