What Checks Do Bridging Lenders Carry Out?

Every lender conducts certain checks before agreeing a bridging loan or development finance application. Although each lender views applications differently, it's important to be aware of the more common checks you're likely to encounter.

Make sure you have your bases covered and your finance application prepared, by considering the following areas that will be looked at by the lender.

STRENGTH OF THE ASSET

This will include; type of asset i.e residential, commercial, land; location, quality of the building, its commercial success, its future opportunity, is it “liquid” i.e can it be sold easily if there are problems. Is its value average for the local postcode. Does it suffer from damp, knotweed, subsidence, flood risk. Is there a good covenant in place? If refurbishing, how complex are the works, do you need planning, if so, is it in place yet. If not, what are the risks you might not get it? There are many factors that can affect the viability of the asset for secured lending purposes, most of which should be picked up at the valuation stage.

AFFORDABILITY CHECKS

Although most applications don’t include affordability checks, information around affordability can be requested should the client wish to service the interest for the loan, rather than having it rolled up. If you do intend to service the loan, you will need to evidence your ability to afford it, by way of tax documents, accounts, bank statements or lease agreements.

IS IT REGULATED

Some lenders are unregulated and as such, can’t offer FCA (Financial Conduct Authority) regulated bridging loans. This is an important regulatory point and can’t be overlooked.

Although there are a number of factors affecting what constitutes a "regulated loan", the main gist is that an application becomes regulated if it is to a private individual and secured as a first charge against a property that is to be used as their principal place of residence.

CREDIT HISTORY

Not all lenders are overly concerned by an applicant’s credit history, but many are. Lenders will generally be keen to check credit history before releasing funds. In addition, all lenders will conduct bankruptcy searches to ensure the applicant is not currently bankrupt. Discharged bankrupts and poor credit do not mean you will not get the loan, it just means you need to choose your lender more carefully. Hence why it's even more important to use a specialist bridging broker to help navigate your way to the most suitable lender for your credit profile.

ID CHECKS AND "KYC"

As part of the anti-money laundering rules in the UK, all lenders must do their “KYC” checks – this means they must “Know Their Client”.

Customers will need to prove to lenders that they are who they say they are, using formal identification. The lender will usually require the following:

• A certified copy of your driving licence or passport
• 2 certified copies of a recent utility bill or bank statement (within the last 3 months is usually classed as recent)

Most lenders also use a computerised referencing system such as Verify or Creditsafe.

Lastly, let's not forget Google. Without doubt, if it's on Google, the lender will find it. Therefore, don't hide anything. Get it out at the open so that it can be dealt with by your broker at the outset. If you hide something that they find later, there is a chance the lender will pull out of the deal. However, if you are open and transparent from the beginning, you can put your point of view forward first, and the broker can guide you on which lender will have the most sympathetic ear.

LEGAL DUE DILIGENCE

The lender will always look to instruct their own solicitor to conduct independent legal checks. This includes checking the loan documents are all completed correctly, the parties are all aware of exactly what they’re doing and ensuring a charge can be registered successfully against the property.

The solicitor will go into detail on the history of the property, as well as analyse any legal risks that could present themselves, such as planning disputes, title issues, restrictive covenants, previous charges on the property etc.

Once completed, the solicitor will prepare what's called a "Report on Title" or R.O.T for short, which they will send to the lender for sign off.

It's only once the ROT is received, and the lender reviews all elements of the deal, that the funds will be released.

EXIT STRATEGY

How are you going to repay the loan? this is a crucial part of any bridging loan application.

For example, if you have bad credit and are saying you will repay the loan via a BTL refinance; the lender may ask for you to provide a mortgage Agreement In Principle from the mortgage lender, to demonstrate that refinance is in fact an option.

If you are going to sell the property to repay the loan, they may mandate that you must have the property listed for sale within 3 months of the bridging loan end date.

If you are buying a plot of land to then develop using development finance, then they may ask for a development finance DIP to ensure you are actually eligible for the finance to build out the site.

LOAN TO VALUE (LTV)

Is it a straightforward low leverage loan against a liquid residential asset in a good location, or is it a high leverage loan against a challenging illiquid commercial asset in a secondary location.

This will play a central part of the lenders decision making process, and will effect the likely success of the application and the interest rate.

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Article written by Matthew Dailly

Managing Director of Tiger Financial Ltd, a leading bridging loan and development finance broker.

www.tigerfinancial.co.uk