Underwriting is the process of evaluating a borrower’s ability to repay a loan.
It is performed by an underwriter, typically an employee of the bridging finance lender, who evaluates a loan application in order to determine the borrower’s creditworthiness and likelihood of repayment.
In this guide we'll cover the fundamentals of bridging loan underwriting in the UK. Bridging loans are short-term finance options designed to bridge a gap between two transactions, most commonly used when buying and selling property.
In order to secure a bridge loan, an underwriting process will be necessary.
An underwriter may consider different factors depending on whether the finance being sought is a regulated bridging loan Vs an unregulated bridging loan.
Bridging loans secured against property where the borrower or their family reside are considered regulated bridging loans and the underwriting will be governed by the Financial Conduct Authority (FCA) and is subject to the guidelines set out in the Mortgage and Consumer Credit Market Review.
Bridging loans secured against property where the borrower currently does not, or ever will, reside are unregulated bridging loans. These types of loans are not governed by the FCA and are typically sought for commercial or property investment purposes.
The underwriting of unregulated bridging loans is simpler than regulated and focuses on the property security being offered. The underwriter will analyse: the valuation report, the loan-to-value ratio of the property, the bridging loan amount being sought, the requested term length of the loan and the viability of the exit for the repayment of the loan. Because the underwriting isn't governed by the FCA it doesn't need to conduct in depth analysis of the borrower's affordability, as such underwriting unregulated loans is a quicker process.
Underwriters consider more factors associated with affordability for underwriting a regulated bridging loan, such as credit history, job stability, income level, and debt ratios in order to determine whether a loan is a safe investment and to determine the terms of the loan.
Due to the legal requirements of protecting the borrower, underwriting regulated loans increases the time it takes for a borrower to obtain a bridging loan.
An underwriter’s job is to assess the risk associated with an application by performing an analysis of the borrower’s current financial situation when they apply for a bridging loan.
The underwriter will look at the property being offered as security for the loan which will involve analysing the surveyor's valuation report or automated valuation, in addition to the borrower’s credit history, debt-to-income ratio, income, job history, and other factors in order to determine the amount of risk associated with the loan.
The underwriter must be sure that the borrower has the ability to pay back the loan based on their anticipated exit strategy and current financial situation.
If the underwriter believes that the borrower is a good fit and has the capability of repaying the loan, they will approve the loan.
Underwriting for unregulated bridge loans in the UK typically takes around one to two days to complete, although some lenders can offer a same-day decision meaning the whole process of obtaining an unregulated bridging loan can be completed within a fast 3-day turnaround.
Regulated bridging loans can take 2 weeks to underwrite. The speed of the underwriting is also heavily dependent on the borrower providing all the relevant information and documents requested by the underwriter in a timely manner.
The bridging loan underwriting process typically involves five key steps:
1. Loan Application and Documentation: The borrower must fill out a loan application and provide the necessary documents proving their identity and financial information.
2. Credit Review: The underwriter will review the borrower’s credit report to assess the risk associated with the loan.
3. Property Valuation: The underwriter will review a property valuation report to ensure that the property provides enough collateral for the loan and that the value of the loan will not exceed the lender's maximum loan-to-value ratio of the property.
4. Loan Decision: After reviewing all of the information, the underwriter will make a loan decision.
5. Documentation Finalisation: After the loan has been approved, the underwriter will prepare the final loan documents and the borrower will sign them to complete the process.
The best way to ensure quick underwriting is to be prepared. Before applying for a loan, make sure you have all the necessary documents.
If you want to find out how to speed up the process in an easy to understand visual way, we share our top tips on our how to get a lightning fast bridging loan infographic.
Additionally, if your bridging loan will be a regulated product, then make sure you know your credit score and have a good understanding of your financial situation so that you can accurately represent it to the underwriter.
Finally, make sure you fully understand the terms of the loan by reading the documentation carefully before signing.