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.
One of the most difficult things to do with regard to credit is to improve your scores once they have dropped. It doesn’t matter if it is because of late payments, balances on credit cards being too high or something else.
There are two main reasons for this difficulty. They are a lack of knowledge of how to do it and an inability to confront the subject. The inability to confront the subject is actually connected to the lack of knowledge on the subject of credit.
If one had the knowledge, it would be much easier to confront. But because credit and finance are not taught in high school and because these subjects have been made more complicated than necessary, it is hard to really learn enough about them to get a good understanding of them.
Not having the understanding necessary to control anything will put you in a position where you find it difficult to confront it. The subject of credit has been made less understandable so that certain people can profit from it.
My goal is to give you the knowledge and power so they don’t profit from you. Instead, I want you to profit from having good credit, getting better terms when you use credit and not being taken advantage of.
So if you or anyone you know has had their credit score drop for any reason, this post gives you one of the tools that can be used to increase credit scores.
Re-establishing credit after your score has dropped is a key to getting it where you want it. Honestly, I think most people don’t do anything about it when their scores go down. Instead, they either ignore it completely, complain about the unfairness of the credit scoring system or stop using credit, at least for a while.
Fortunately, there are some easy ways to begin re-establishing credit after things have gone wrong. One of the simplest ways is to use a secured credit card.
A secured credit card is different from regular cards because it is actually secured (backed by something of value). Most credit cards are given without anything to ensure the debt is paid other than the threat of being reported to the credit bureaus, being sent to collections or being sued for the unpaid amount.
Secured cards are different. Here’s how they work.
You open a savings account for a certain amount and get a credit card for the same amount. You can’t touch the money in the savings account as long as the card is secured by it but it helps you establish a new account without any late payments. This is very important for anyone who either has bad credit or no credit at all.
It is also very easy to get approved for a secured card because there is very little risk of loss on the part of the credit card issuer.
There are some tricks in using this account. Here are the main ones:
- Only use it once a month for something that you would normally pay cash for. This keeps your balance low, improving your credit score.
- Pay the balance every month. After all, you would have paid cash for the thing that you bought anyway, so just treat it like cash and pay it off. This prevents you from wasting money by paying interest on the card.
- Just in case you forget to pay the bill on time, set up an automatic payment for at least the minimum required. This prevents you from having any late payments on the account which would damage your credit and cost you more money.
- Get the card from a credit union rather than a bank. Credit unions are more likely to approve you and they have lower interest rates than banks.
If you follow these simple steps after having your credit scores drop, you will see your credit scores increase. This can happen in a relatively short period of time. I used this information to re-establish my own credit after going through a bankruptcy.
At the time, I didn’t have any credit score because I hadn’t used credit for about 4 years. Within 9 months, my score was over 700, putting me in position to use credit to my advantage.
If you liked this tip and want more information about credit, go to CrackMyCredit.com
Owner occupied hard money is one of the most misunderstood subjects in the mortgage industry. Most people, including mortgage brokers, hard money lenders and even attorneys, don’t understand how it works.
Many of them will tell you it can’t be done. Others think that because it’s hard money, the rules don’t apply. Neither of these are true.
The fact is that there are ways to do it correctly and there are rules about how to do them. In other words, there are limitations on what can and can’t be done. The purpose of this post is to clear up some of the confusion in this area.
The most common type of owner occupied hard money loan is the business purpose loan. As you might guess, the purpose of the loan must be to use the money for business purposes but there is a bit more to it than just that.
To qualify as a business purpose loan, the money needs to be used for a business that the borrower has an ownership interest in. This could be a new business being purchased or started, an existing business or a business that used to exist but doesn’t anymore.
An example that you might not think of is to pay off debts that were incurred for the business, like when a business owner uses credit cards to expand their business or to get through rough times.
Fortunately, to qualify as a business purpose loan, not all of the money has to be used for business purposes. The rule is that the primary purpose of the loan has to be for business use, meaning that more than 50% of the loan proceeds has to be used for business.
So if you want to put $100,000 into your business and you also want some money to pay down your credit cards that were used for personal expenses, as long as the amount being put into the business is more than the amount being used for personal expenses, the loan would still be considered a business purpose loan.
A major benefit of the business purpose loan is that the guidelines are pretty simple and easy to understand. There are no specific appraisal requirements other than the lender needing to make sure that the value is sufficient to protect them in the event of default.
Proof of income is generally not required. Proof of assets other than the property being used as collateral is also not normally required. What is required is a clear statement of how the money will be used. It must be written and signed by the borrower.
If you have any questions about how these loans work or if you could qualify, please call or fill out the contact form on our website.
In the next post, I will cover the next type of owner occupied hard money loan, the bridge loan or temporary loan.
It’s no secret that the credit scoring models used to generate your credit scores were created for a purpose. The original purpose was to determine the likelihood of having a 90-day late payment within the next two years. Clearly, credit scores are inadequate to achieve this purpose.
Credit scores don’t take into account any of the other factors that could cause someone to be late on any payments. For example, they don’t include any data on your income, savings account, the condition of the business or industry you are part of, inflation, the economy or anything else other than your accounts that are reported to the credit bureaus.
And even if the 90-day late prediction is still the stated reason for their existence, there is much more to the use and manipulation of credit scores now than was ever stated when they came into existence.
The problem is that the scores are arbitrary. Algorithms have been created and changed over time that affect credit scores. Within these algorithms there are things that cause scores to go up and down when certain things happen. For example, opening a new account can cause your score to go down. Closing an account can also cause your score to drop.
But new accounts, in spite of these algorithms, do not always increase the likelihood of you being 90 days late on an account. How about when you open a new account so you can get the money needed to increase your income? That should decrease the likelihood of you getting behind on your bills.
There are tons of other examples I could use to show that the system is flawed. It isn’t hard to show.
The big question is, who benefits from lower credit scores?
There are two main groups who benefit, plus one large company. The groups are credit reporting bureaus and banks. The large company is Fair Isaac, the creators of your credit scores.
Here’s how it works. When you have a high credit score and a clean report, you decide to buy something on credit and you are given that credit with low rates and good terms. In most instances, your credit is pulled once then you buy.
But when you have bad credit or even fair credit, it doesn’t work the same way. Often, you try to buy something on credit but need to check multiple places, either because you were turned down or because the rate and terms weren’t what you wanted.
Using an example I have seen often, late’s say you are looking for a mortgage and get turned down at your bank after credit has been pulled. Then you go to a mortgage broker who pulls your credit. Even if he can do the loan, the lender he uses will normally pull credit too. Sometimes, the broker can’t do the loan and the you have to check with someone else.
Eventually, you end up having your credit pulled 3 times, maybe more. And every time your credit is pulled, Fair Issac and the credit bureaus make money. In this case, they have made at least 3 times as much money as they would have if you had been approved by your bank.
Since I have now mentioned banks again, let’s go into how they profit from lower credit scores. It’s really very simple, if you have an 800 score, you pay the lowest rates. If your score is a bit lower but still pretty good, you might pay a little more. But if your score is bad, your interest rates will be significantly higher.
In short, the higher your credit score, the less money is made by banks, credit bureaus and Fair Isaac. The lower your score, the more money they make.
The way to combat this and pay less for credit is to learn how your credit score is created and take the steps necessary to improve your scores, putting you into a stronger bargaining position.
For the past couple of months, a day hasn’t gone by that didn’t contain COVID-19 in our everyday conversations. While this is distracting at the very least, there are other effects besides people getting sick and the economy being mostly shut down.
And for the record, COVID-19 did not cause the economy to shut down. The hysteria caused by mainstream media and certain politicians is what has caused most everything in our economy to stop.
I can’t say for sure whether the shutdown was intended to cause damage to the world economy but I believe it was, just like the “Great Recession” was engineered by the big banks so they could make billions of dollars while the economy crashed and many smaller banks went out of business. (I could go on about this but that is a subject for another post.)
With the economy shut down, it is no secret that many people have been hurt financially. No one knows the full extent of the damage at this point but it will certainly be talked about in the months and years to come. The fact is that the most damaged will be small businesses.
Unfortunately, small businesses employ more people than big businesses do. This fact makes it clear that when you damage small businesses, you are hurting the majority of the population. And in spite of bailout money (which I still haven’t seen anyone receive, regardless of the claim that all the money has been spent), many small businesses are facing difficult times, now and in the near future.
This will cause some of them to close, affecting not only the business owners but also employees and their families. More people will miss mortgage payments, credit card payments and car payments because of reduced or no income.
And while I cannot tell a client not to make a payment (this is against the law for someone who is a licensed loan officer), I will say that people will need to make choices.
When you can’t make all your payments, you will need to prioritize your bills. Food, while not technically a bill, has to be a top priority. Rent or mortgage is next. Car payments could be next. credit card payments will likely be at or near the bottom of the list.
No one wants their credit score to go down the tubes but we all have to make choices. One’s credit score may have been a top priority when things were easier but when it comes down to a choice between your credit score and keeping a roof over your head or feeding your family, to hell with the credit score. You can fix that later.
People are going to have late payments. They are going to have higher credit card usage. They are going to be looking for more credit to get through the problem of having less income. All these things are going to cause a decrease in credit scores.
There will be millions more people looking for solutions to their credit. Some of these people will go to credit counseling services that may or may not explain to them that their credit scores will most likely drop like a stone. Others will sign up for credit repair to fix the problem. Maybe it will, depending on what company you choose.
But none of this changes the fact that the average credit score is going to go down in the aftermath of COVID-19. People will need solutions to get their credit scores fixed. And there are solutions. Choose wisely.