Why a Hard Money Loan Can Be a Good Opportunity for People with Bad Credit

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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 hard money lenders that base their lending decision on the property itself while taking calculated risks on home loans for people with poor credit scores. 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.

Jump to Frequently Asked Hard Money Questions

We have noticed private mortgage lenders are rolling out new Non-QM programs to borrowers seeking hard money loans with bad credit scores, tax liens, foreclosures, short-sales and even bankruptcies.

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  • Review Hard Money Lenders Offering Aggressive Loan Solutions Today
  • See New Private Money Loans for Cash Out, Fix & Flip Options
  • Discover Hard Money Credit Lines and Loans for Poor Credit and People with Income Documenting Problems 

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 from Respected Private Mortgage Lenders

As you know, most home loans require proof of your ability to repay it. Most mortgage lenders for bad credit 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 mortgage 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.

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How Hard Money Loans Differ from Traditional Mortgages

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. Private mortgage lenders offer purchase money, refinance and home-equity loans with bad credit.

In the past a private money loan with bad credit was usually a short term loan of no more than five years. These days you can find a few subprime 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. Today, you are more likely to find a private money loan for poor credit with better terms and more affordable payment options.

So Why Use Hard Money Loan Programs?

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 history mortgages. Here are some advantages:

  • Hard money loans are 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 financing 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 for hard money mortgages can be 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. Learn more about how to buy a house with bad credit.

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 in most instances, the mortgage rates are much higher. In the past, you easily could pay a 14% interest rate on a hard money loan with bad credit. Today, there are private mortgage lenders that offer high risk money loans with more reasonable interest rates and terms, but it’s still typically higher. So why would you want to use a hard money loan if it is so expensive?

Find out now if you are eligible for a hard money loan for cash out.

hard money cash loans

Here are some signs that you may need a hard money loan today:

  • 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.

  • You Need Flexibility

Hard money loans are more flexible than regular mortgage contracts. Hard money 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.

  • You Need an Approval But Have Bad Credit

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. Sometimes finding a hard money lender for bad credit can be difficult if you don’t know where to look. The RefiGuide has built a strong reputation for helping consumers locate hard money lenders for poor credit. You need an underwriter from a private money lender to approve a home loan for people with bad credit.

  • 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.

  • 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 bad credit 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.

  • 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 Home Refinancing in Trump Era

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 home 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 could pay monthly on a 8 to 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.

Talk to Hard Money Lenders to see if a private money loan meets your needs.

Talk to Hard Money Lenders to see if a private money loan meets your needs.

If you are looking for a hard money loan, here are some things to look for:

Use an Experienced Hard Money Lender or Private Money Company

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 2020 who has many years of experience closing and funding the types of deals that you do.

Look for Local Hard Money Lenders Offering Bad Credit Loans

The majority of hard money lenders for bad credit want to look over the property that is securing the loan. The best option is to find a good local hard money lender that has built a reputation closing these types of high risk mortgages that you need. 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. Whether you are searching for home financing or mortgage-refinance loans, we suggest, checking 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 for Private Money Financing

Many hard money bad credit 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.

Understanding 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 and fix and flip 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.

Tips to Find the Best Private Money Lenders Online

Anyone who is involved in real estate investing has probably heard the term ‘hard money loan.’ If you have heard the term but are not familiar with hard money loans, you should probably learn about them; many beginning real estate investors need to tap hard money to get some of their flips and buy and hold deals done.

What Does Hard Money Loan Financing Look Like?

We are glad you asked! A hard money loan is a short-term loan that is backed by real estate, typically offered by private money lenders. The word ‘hard’ refers to the loan being backed by a hard asset. If you do not pay the loan, then the hard money lender will take possession of the property.

Hard money loans are generally based upon the deal and the piece of property, rather than upon your personal credit, although the latter can be a factor in your interest rate.

Hard money loans are funded by private investors, rather than conventional mortgage lenders, such as credit unions or banks. The term for most hard money loans runs from six to 12 months; some hard money financing may be extended for a few years. You are required to pay on the loan each month, and it can be interest only, or interest and some amount of principal.

The amount of money you can borrow will depend upon the value of your property. The property could be one that you already own, or want to use for collateral. It also can be one that you want to buy.

What Deals Should You Use Hard Money For?

Hard money is not for every type of real estate deal. Of course, if you are buying a personal residence and you have sufficient income and credit history, you will want to get a conventional mortgage through a bank.

Hard money is your best option when banks will not loan you money for a property. This is very common on investment properties that need to be fixed up before they can qualify for conventional financing.

Below are some of the most common types of real estate deals that may involve hard money:

  • Fix and flips – the most common by far
  • Construction loans
  • Investor needs cash fast with minimal underwriting hassle
  • Short term buy and hold – best to refinance in a year or less

Do Hard Money Loans Still Exist?

Yes, Hard money loan programs are alive and thriving. Hard money costs more because the risk is higher for the investor; you can easily pay 13% interest or more, plus up front points. So why would you use it?

Hard money can be used to fund a deal fast. If the investment makes sense, a hard money mortgage can be funded within seven days. Even if you can get a conventional loan on your property (unlikely on a fixer upper), the approval and funding process can take 1-2 months. That long delay will cost you deals.

Hard Money Loan Rates and Costs

A hard money financing can cost you 10-15% in interest and points can be up to 2-4% of the amount being loaned. You will generally need to bring money to the table to get a loan funded with hard money. Hard money lenders will often lend 65-75% of the current value of the house, or possibly of the after repair value.

Frequently Ask Questions

In this section we cover the following topics:

How do hard money loans work?

A hard money loan is a short term, high interest loan backed by real estate. Hard money loans are funded by the private investor rather than a bank or credit union. A hard money loan term is typically six or 12 months, but it can be extended in some cases for pu to five years. Interest only payments are required each month. These loans are most often used by house flippers who want to rehab a property and sell for a profit within six months to a year. (retipster.com)

Are hard money loans a good idea?

Hard money is expensive, so is using it a good idea? There are three major advantages to a hard money loan:

  • Speed: You are borrowing from an investor or group of investors, so you can usually get the money in days or up to two weeks. The lender cares mostly about the collateral (the property). They do not need to spend as much time focusing your credit and finances.
  • Flexibility: Each deal is scrutinized individually. There is no complex underwriting process such as getting a standard consumer mortgage loan.
  • Approval: Collateral is what matters for approval, not your personal finances. But you will need a hefty down payment of up to 25% or 30% usually. (the balance.com)

Do hard money lenders require down payment?

Most hard money lenders require you to make a sizable down payment. You can expect to pay 20% or 30% for the loan to close. The higher down payment amount is because the lender is taking a sizable risk that you will be able to pull off the flip on the property and pay back the hard money loan with interest in the established timeframe.

There are some hard money lenders that do not require a down payment, but you can expect to pay a very high interest rate, and the property will be very carefully scrutinized as to its potential worth. (dohardmoney.com)

What happens if you default on a hard money loan?

If the borrower defaults on a hard money loan, the lender will take possession of the property and sell it for what it thinks its market value is, which it established before the loan was issued. The lender may not report the default to credit bureaus, but this depends. Another option is to do a ‘deed in lieu of foreclosure.’ This is where the borrower simply gives the property back to the hard money lender so there is no possibility of a foreclosure appearing on their credit report. (delanceystreet.com)

Is it easy to qualify for a hard money loan?

Generally, yes. Unlike a regular bank loan, the major factor the hard money lender is looking at is the potential profitability of the deal. Banks will put great focus on the property but also on the creditworthiness of the borrower as they often are lending as much as 95% of the value of the property.

But with a hard money lender, they mostly review the value of the property. Your past experience in the field of real estate is a factor, but generally hard money loans are easier to get than a bank loan. (abl1.net)

What are the requirements for a hard money loan?

To get a hard money loan, you need to have a real estate property that the lender deems of sufficient value and potential profitability to do a loan on. You need to do your due diligence on the property, neighborhood, property values and other factors to decide if there is enough money in the deal to make it a good flip prospect (most hard money loans are used for 6-12 month flip projects).

You also need to usually have down payment of 25% or 30%, although some lenders will take less (with a higher interest rate).

What is a hard money loans for bad credit?

If you have bad credit and you want to get a loan on a property, you still have some options. Hard money lenders generally do not put much emphasis on the borrower’s credit profile to make a lending decision. Many hard money lenders base the lending decision on the value of the property and its potential after repair value or ARV. So, if you have bad credit, this is not necessarily an obstacle to getting a hard money loan.

Do Hard Money Lenders check credit?

Some hard lenders may check your credit score but will not generally base their lending decision on this matter alone. The major thing they are concerned about is the condition of the property you want to invest in and what its potential profit could be after it is repaired. Hard money lenders may review your tax returns and bank statements and credit, but the potential of the property is most important. (biggerpockets.com)

Is a Hard Money Loan considered a cash out transaction for underwriting purposes?

A hard money loan or private money loan is generally considered a cash offer. The reason is that the money is usually available within a few days once the lender has made a decision to lend on a particular property. This is one of the major reasons that people turn to hard money: They need to get cash very quickly to get a real estate deal that could be snatched up by another investor immediately. (sunpacificmortgage.com)

Can you refinance a hard money loan?

Yes. A hard money loan is usually used as a short term loan so that a property can be rehabbed and flipped. However, situations arise where the investor may want to hold onto the property for a longer period of time. For example, he may decide he wants to rent the property out and hold it for several years. The high interest nature of hard money loans makes this an unprofitable endeavor. But once the property has been fixed and can meet conventional lending standards, it is possible to refinance out of the hard money loan and into a conventional, lower interest loan. (chron.com)

Are hard money loans interest only?

When a borrower takes out a hard money loan for investment purposes, they typically are very high interest only loans that are intended to be used for six to 12 months to flip a property, in most cases. There is no principal paid on this type of hard money loan. When a borrower is seeking a hard money mortgage to avoid foreclosure, they are typically getting financing terms of 15 to 30 years, with the intention refinance into a lower interest rate when their credit rebounds. Keep in mind that in addition to paying high interest of 10-15% for the loan, you also will be charged two to three points in processing fees. So, you can expect to pay a few thousand dollars in fees in addition to the interest on the loan. (freeandclear.com)

What is a hard money lender for real estate?

A hard money lender for real estate is a private money lender that lends money to real estate investors that cannot qualify for traditional financing through a bank. Rather than using deposits, a hard money lender uses capital from many private investors to fund hard money loans for borrowers. A hard money lender for real estate usually offers loans to real estate investors who want to fix a property and flip it for a profit. So, the loans are typically six to 12 months in length, although they can be extended in some cases. (freeandclear.com)

How much do you have to put down on a hard money loan?

Because of the higher level of risk the lender has with a hard money loan, it will require a higher down payment than on a conventional loan. It is common for hard money lenders to want anywhere from 25% to 40% down on a property to make a hard money loan. Few hard money lenders will lend money without a large down payment as the chance of default is high.

How can I get a hard money loan for a flip?

Real estate investors who want to get a hard money loan for a flip need to check with several hard money lenders in their area to see if they will consider making a loan on a specific real estate property. Different hard money lenders have different lending criteria; some lenders will not consider lending in a certain area of a city, while others will. Check with several lenders to determine which will consider issuing a loan on the property you want to renovate and flip, and then see what the interest rate and fees will be.

How do Points work on hard money loan?

One of the aspects of hard money loans the investor must consider are the points the lender will charge you upfront to do the loan. It is typical for a hard money lender to charge three or five points up front on the loan. One point represents 1% of the loan value. So, five points on a $100,000 property would equal $5000 up front, in addition to the monthly interest charges.

Do Hard Money Lenders report to credit bureaus?

For the most part, hard money lenders do not report payments and non payments to the major credit bureaus. Hard money lenders operate outside the norms of conventional lending institutions and as such, do not generally report activity to the credit bureaus. Just note that if you do not make payments on the loan, the lender will take the property, could charge you legal fees and other costs.

How can I invest in real estate with no money and bad credit?

Investing in real estate with no money and bad credit is challenging but possible. There are hard money lenders out there that will ask for less money up front to make a hard money loan. You will still need to have some money down to close the loan, so you may ask people you know to loan you money to close your real estate deal. You also may tap the equity in your home to fund the down payment.

What questions should I ask a hard money lender?

These are the most important questions to ask a hard money lender:

  • What are the points and interest?
  • What is the loan term length?
  • Is the loan based on ARV or the property’s value today?
  • What are the upfront fees?
  • How much is the down payment?
  • What penalty fees are charged?
  • How are funds disbursed for renovations?
  • How long does it take to close the loan? (socotracapital.com)

What is the difference between cash and hard money?

While some investors refer to hard money as a cash offer, it is still a loan. So, as such, it is not a cash offer. This can be an important point because even though hard money loans still can be closed quickly, nothing closes quicker than an all cash deal.

About Bryan Dornan

Bryan Dornan is a Financial Journalist and currently serves as Chief Editor of RefiGuide.org. Bryan has worked in the mortgage industry for over 20 years and has a wealth of experience in providing mortgage clients with the highest level of service in the industry. Bryan's continual focus is to promote affordable home-ownership to consumers like you across the United States. He also writes for RealtyTimes, Patch, Medium and other national publications. Find him on Twitter and Muckrack.