A hard money loan is asset-based financing in which real property is used as collateral for a loan. They are typically issued at much higher interest rates than traditional loans. Commercial banks or other deposit institutions rarely issue them. Instead, hard money lenders (private investors, savings and loan associations, private equity firms, etc.) provide the bulk of hard money lending.
If you are considering taking out a hard money loan, it is important to understand how they work and the risks and benefits before making a decision. Hard money loans can be an extremely helpful tool for borrowers with bad credit looking to invest in real estate, but they also come with some risks that should be considered before taking out a loan.
Borrowers with bad credit can still qualify for a hard money loan, although they may have to pay a higher interest rate. The most important factor in qualifying for a hard money loan is the value of the property used as collateral. Lenders will typically only lend up to 70% of the property’s appraised value. Borrowers with bad credit can still qualify for a hard money loan by putting up additional collateral, such as another piece of property or a stock portfolio.
How does A Lender Evaluate A Borrower?
As I told you, a hard money loan is based on assets. The risk for the lender is less in this kind of loan. In the traditional style of financing, your credit score is the most important thing. You can’t expect to get a loan from a bank with bad credit.
Fortunately, a hard money loan is an unconventional type. The lender is more concerned with the asset and its value than your credit score. They are not even interested in the debt-to-income ratio. However, the most important thing that can decrease the fee and interest rate is when the borrower is an experienced flipper.
Lenders will also inquire about documents like credit reports, tax, and bank statements. If your down payment is worried, the lender will not make it any concern. And it’s a good thing because traditional lenders make it a deal while issuing a loan.
For borrowers with bad credit, hard money loans offer a way to finance their real estate investments even when they would not be able to get a loan from a traditional lender.
Hard money lenders will generally require the borrower to have a down payment of 20% or more, as well as collateral for the loan in the form of equity in the property. They can be used for a variety of purposes, including the purchase of an investment property, the refinancing of an existing loan, or even the construction of a new home.
Wrap up
If you have bad credit and you are thinking of getting a hard money loan to flip a house, you can do that. Your low credit score won’t be a hurdle to financing a property. However, you should know where to look for lenders. Because most lenders don’t issue.
