by Dusty Brazil
CA BRE #01780273
Pacific Sotheby’s International Realty
Del Mar, CA 92014
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 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.
These are hard money lenders. 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 can get many difficult deals done fast.
Hard Money 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 loan for longer than that because your interest rate is 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 loan 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.
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 is expensive; you may pay a 15% interest rate. 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.