If you have poor credit and you still want to get a home loan, either for your own home or an investment property, you still could have some hard money loan options available. Regular bank loans for homes depend upon the borrower’s credit score and income to qualify for a loan. But there are other types of lenders that base their lending decision on the property itself while taking calculated risks on home loans for people with bad credit.
These are hard money lenders that specialize in taking risks offering home loans for people with bad credit or difficulties documenting their income with traditional methods. If you need a loan to happen fast and not be dependent upon your credit score, a hard money loan for bad credit could work for you, at least in the short term. You will pay more in interest and there are considerable fees, but a hard money loan for people with bad credit can get many difficult deals done fast.
Hard Money Loan Overview
As you know, most home loans require proof of your ability to repay it. Most lenders will want to see your credit scores and the income that you have coming in regularly to pay off the loan. If you have a good history of responsible borrowing and you have enough income, as determined by your debt to income ratio, you will get approved.
As you also may know, if you have poor credit, you will have problems getting approved for a regular home loan. It still may happen, but you will pay a much higher interest rate. The other problem is that a regular home loan can take months to close, especially if you have poor credit. And even if you have high credit scores and high income, getting a regular home loan closed can be difficult.
How Hard Money Loans Differ
A hard money lender is a private lender that is not affiliated with a bank or regular mortgage lender. The hard money lender loans money based upon the value of the property that secures the loan. They are not as interested in your ability to repay. In the worst case scenario, the lender will take the home back if you default and resell it. The value of the home is more important to them than your credit or financial standing.
Hard money loans for bad credit are popular with many borrowers who have had past bankruptcies or foreclosures but have enough equity to be considered for a private money loan product.
In the past a hard money loan was usually a short term loan of no more than five years. These days you can find a few subprime mortgage lenders that offer hard money loans with longer terms. You usually do not want to hold the private money loan for longer than that because your interest rate is typically much higher than a regular home loan.
So Why Use Hard Money?
Why would you want to use money with a high interest rate? Hard money is very useful for some borrowers, especially those with poor credit mortgages. Here are some advantages:
- Hard money is fast. The lender is worried about the value of the home and not your financial information. So a hard money loan can be closed in days or in a few weeks. If you do deals regularly with a hard money lender, you will find that the process can take mere days. Getting a private money loan for bad credit closed quickly is very important in some situations, such as with investment properties. If you don’t buy an investment property fast, you could lose the home to another buyer.
- Hard money is flexible. Lenders of hard money do not use regular underwriting. They look at each loan deal on an individual basis. You may be able to change the schedule to repay the loan. Most of these lenders are small companies, not huge financial institutions, so there may be more room to negotiate than on other loans.
- Approval is easier. The collateral you are borrowing on is the most important factor in a hard money loan for bad credit. If you are purchasing an investment property, you will receive as much as the property is worth. Many hard money lenders do not even care if you have a foreclosure or bankruptcy on your record.
However, note that hard money lenders will not usually lend 100% of the property value. Most lenders will not lend more than 70% of the property’s value, so you do need to have some cash on hand to do most of these deals. This protects the lender if you default, because the lender will be able to resell the property at a lower price and get their money back and then some. Nobody ever said there wasn’t significant risk involved in making home loans for people with bad credit scores.
For a person with poor credit who wants to buy their own home, a hard money loan might make sense in some situations. You need to remember that a hard money loan for people with bad credit can be expensive; in fact you could be asked to pay a interest rate ranging fro 6% to 15%. However, if you really need to buy a particular home immediately and will lose it if you wait, getting a hard money loan for a short time may make sense.
Some borrowers with poor credit get a hard money loan for six months to a year. Then, they work on getting their credit score up as quickly as they can. When they have a FICO score that is at least 620 and hopefully 640, they may be able to refinance the hard money loan.
Another scenario for a borrower with poor credit is one who lost his job recently and cannot currently qualify for a regular home loan. Regular lenders will check to make sure you have the income to repay the loan. Most hard money lenders will not check that you have a job or regular income. So, you may be able to get a hard money loan temporarily until you get a regular job again. Then you may be able to pay off the hard money loan for bad credit and get a regular home loan. Most hard money loans are used for fix and flip properties, but you may use one for buying your own residence.
Hard money loans are expensive and they are not for everyone. But, people who have poor credit and really want to buy a particular house – for an investment or to live in – can use a hard money loan on a temporary basis. Once their financial situation is better, they can then hopefully get a regular home loan. In the mean time hard money loans for bad credit are nothing to be embarrassed about.
6 Signs You Need a Hard Money Loan
People who invest in real estate are usually familiar with a hard money loan. Hard money refers to a way to borrow money that does not use regular mortgage lenders.
The reason that you cannot generally use traditional lenders for many real estate investment transactions is that the loan needs proof that you can repay it. Lenders for regular mortgages go through your income and credit scores and other financials to determine if they think you have the ability to pay the loan back. If so, you get approved. If not, you get rejected.
On the other hand, a hard money loan financing typically comes from an individual or an investor who lends money based upon the value and potential of the property you are borrowing it for. The decision to lend is based upon the collateral that secures the loan, and they are not as concerned about your ability to pay.
If you do not pay the loan, the hard money lender simply takes possession of the property and sells it for as much as possible.
Hard money loans are generally easier to get than traditional mortgage loans, but the rates are much higher. You easily can pay a 14% interest rate on a hard money loan. So why would you want to use a hard money loan if it is so expensive?
Here are some signs that you may need a hard money loan today:
#1 You Need Money Fast
When you are investing in real estate, you will often lose deals if you must wait months to be approved for a loan. Hard money loans are focused on the property, not your finances, for the most part. So you can get the money faster. Many hard money mortgages and home loans for people with bad credit can close in less than two weeks.
If you are a regular with a hard money lender, the process can move even faster. This can be very advantageous when you are dealing with a property with multiple offers. Often the guy with the fastest cash wins.
#2 You Need Flexibility
Hard money loans are more flexible than regular mortgage contracts. Lenders are not using standard underwriting. Instead, they run the numbers on every deal individually. Depending on the deal and your situation, you may be able to adjust how long you borrow the money for or the interest rate. Most hard money lenders are not huge companies and there is more negotiation involved in some deals.
#3 You Need Approval
The key factor for the hard money lender is the collateral. If you are buying a real estate investment, you will be able to borrow as much as it is worth. You need an underwriter from a private money lender to approve a home loan for people with bad credit.
#4 You Have Cash Available
It is a rare hard money lender that will loan all of the money to you that you need. Usually you have to bring some cash to the table. The maximum LTV usually is not more than 80%, meaning you have to bring 20% to the table. This assures the lender that they can sell the property fast if you don’t hold up your end of the deal.
#5 You Need Money for a Short Term
You’d have to be out of your mind to pay 14% interest on a loan for years. Most hard money loans are short term, typically three to six months, with an option to extend.
Many real estate investors use hard money loans to flip properties. They buy the home under market value, do a certain amount of repairs, and then sell the property for a profit. In some cases, the property may sell in just a month or two. In other cases, it can take six months or even longer.
If you need money longer than a few months, you may not want to get a hard money mortgage or a home loan for people with poor credit. And these loans seldom work well for long term buy and hold; the interest rate is simply too high.
#6 You Want To Use Other People’s Money
There are real estate investors who have plenty of their own cash available and can do deals in all cash. But they still may decide to use hard money to do some deals. While they do have to pay interest costs, less of their own capital is tied up in one particular deal. Thus they can do more deals at once.
There are many situations where getting a hard money loan for people with bad credit is the best way to move forward on a real estate deal. If the deal needs to be funded quickly and you lack the cash to do it all yourself – or you don’t want to – hard money can really work well. As long as you are not holding onto the loan for too long, using hard money can help you to make a lot of money in real estate.
Top Hard Money Loan Tips for Refinancing in 2017
Hard money loans can be a good choice in a real estate transaction when you need a quick turnaround on getting the project funded. For example, many fix and flip investors use hard money loans so that they can get the property closed, rehabbed and resold, typically within six months or less.
Conventional mortgages often are not a good choice for short-term transactions because there is much more paperwork and bank verification of credit and income involved. A typical home loan can take 60 to 90 days to close and fund, while many hard money loans can be closed in a few weeks.
A hard money loan may be for a few months or up to three years. It depends upon the type of home that you are buying and what your needs are. Hard money loans for rehabbing a single family home are often from six months to one year. On the other hand, a loan for a commercial property may be two or three years in length.
The most common project types for hard money loans are:
- Fix and flips
- Land loans
- Construction loans
- Credit problem buyers
- When an investor needs fast cash
A hard money loan has a higher interest rate than a conventional mortgage loan because the risk to the lender is higher. You may pay as high as a 15% interest rate, plus several points. While this is usually an expensive loan, it often is the best case possibility for people who need short term funding for many real estate projects.
If you are looking for a hard money loan in 2017, here are some things to look for:
Use an Experienced Hard Money Lender
All of the origination, servicing and legal requirements for doing hard money loans properly are complicated. You should be looking for hard money lenders for bad credit in 2017 who has many years of experience closing and funding the types of deals that you do.
Look for a Local Hard Money Lender
The majority of hard money lenders want to look over the property that is securing the loan. The best option is to find a good local hard money lender. There are a few hard money lenders for bad credit that work nationally, but they will have less flexible lending requirements because they often cannot view the property personally.
Most of the real estate deals we have done with a hard money lender was with a local company. You can check online in your area for good hard money lenders in your city or county. Check for reviews online to see who has had a good experience with local lenders.
Make Sure They Are Licensed
Most of the best hard money lenders for a given area are licensed by the state in which they operate. They also should be registered with such entities as the Nationwide Mortgage Licensing System and Registry. We also recommend that the lender has a valid broker’s license, and verify if any complaints were filed against that agent or broker.
Determine What You Need
Many hard money loans are available out there. You can find hard money lenders who specialize in dealing with foreclosure situations. Others specialize in fix and flip investors, while still others specialize in commercial properties. If you are a fix and flip investor for single family homes, you may be able to turn around the property in six months or less. But a commercial property may take years to turn around.
Understand the Loan to Value Ratio for Hard Money Loans
Most hard money loans are secured by investment properties. The amount that hard money lenders are willing to loan out is generally less than conventional mortgages secured by owner occupied property.
Most hard money lenders will only lend up to 70% or so of the current value of the property. This means that you as the investor will need to come to the table with as much as 30% of the value of the property, plus whatever repairs need to be done.
There are some private money lenders that may allow you to borrow up to 90% or even more of the home’s value, plus repairs costs. But the interest cost and points will be much higher. These are high risk loans, and hard money lenders will cover their bases very carefully in case the investment does not pan out.
Hard money loans can be an excellent deal for investor who have a good deal on a home or a piece of land, and need short term cash to get the deal done.
If you follow the tips that we outline above, you will be able to find a good hard money lender who can possibly make you a lot of money in real estate investing.