The banks will tell you that if you don’t have perfect credit, you can’t buy a home. This is false. There are actually many different ways to buy real estate when you have bad credit.
The fact is that there are many different loan programs available, not just the ones offered by the banks. Hard money is one of the better known loan programs but there are others that can work too. The one that is right for each person is the one that fits their circumstances.
Since hard money has been mentioned already, it will be covered first. Interest rates are usually higher than other mortgage types but most of them also have interest-only payments which helps keep the payments lower since you aren’t paying the loan principal every month.
Hard money, also known as private money, has the most lenient qualifying guidelines, making it easier to get approved. Down payments of anywhere from 30% to 40% of the purchase price are usually required and rates are usually in the 8 – 12% range although they can be higher or lower depending on the situation.
Most hard money loans don’t have any specific credit requirements but if your credit is really bad, you may need a bigger down payment than someone whose credit score is just a little too low for the banks.
Next is non-prime which is the much improved replacement for the old subprime loans. Non-prime loans have become very popular over the last few years but have become much less available due to the COVID-19 shutdown. They are still available, just not quite as much as they have been.
These loans were possible with as little as 10% down payment but that has recently gone up to 25% to 30% down and even more with some lenders. Interest rates have ranged anywhere from just above what the banks charge all the way up to the lower range of hard money.
Another advantage to non-prime loans is the ability to qualify by using bank statements instead of tax returns. This feature is specifically available to self-employed borrowers.
The third loan type that will be covered is the seller carryback (or seller carry), which is where the person selling the property also does the mortgage on it. Depending on the seller, these can be very flexible and in a market where loans are not as available or easy to qualify for, can become fairly popular.
Rates on seller carryback mortgages commonly range in the 6 – 8% range but can go higher or lower depending on the seller.
The beauty of a seller carryback is that they can be used in different ways. They can be done as a 1st mortgage where the seller carries the entire amount borrowed. They can also be used in combination with hard money, making it possible to buy a property with less down payment than what is normally required.
For example, if you only have 20% down but you can find a seller to carry a 2nd while you get a hard money loan for the first mortgage, you could still buy a property. To illustrate this, let’s look at a purchase for $500,00 where they buyer has $100,000 down payment.
If he can get a seller to carry a second mortgage for $100,000, the hard money lender could do a first mortgage for the remaining $300,000 and the purchase can take place. And since the rates for seller carryback mortgages are usually lower than hard money, the more the seller will lend, the lower the overall payment will be.
These three mortgage types are not the only ways to get a loan when the banks won’t do it but the are three common options.