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
A common question about hard money is, does hard money work the same way as cash when buying a property? The short answer is no, but there is a more complete explanation.
Hard money loans are often used in situations where the purchase of a property has to close quickly. Sometimes, this is because the quick close was necessary to get the offer accepted over competing buyers. Other times, it is because the original loan fell through and the buyer had to scramble for a fast solution.
Regardless of the reason, many buyers and real estate agents think of hard money loans as the same as cash. After all, when was the last time a bank closed a loan in just a few days? (In case you were wondering, the answer is never.)
Hard money, also known as private money, is typically handled by a broker with individual investors providing the money for the loan. Because one investor can review an entire loan file in a short period of time, sometimes in as little as a few minutes, it is impossible for a bank to compete on speed.
Their processes are split between different people. They have one person to collect data and set up the file, another one to underwrite the file, another to review the appraisal and another to close the file. This is a simplified version and it usually has more people to handle other steps. The fact is that they aren’t set up to move quickly.
Speed alone can cause hard money to be considered the same as cash but it is still a loan and it requires someone other than the buyer to approve it and produce the money needed for the loan.
You have probably seen listings that said they would only accept cash offers. This is almost always because the seller thinks that the property won’t qualify for any kind of mortgage. In most cases, they are wrong because hard money is used for exactly that type of property.
When making an all cash offer, it is almost always required that you provide proof of funds. The seller and their real estate agent want to see that you have the cash to close. And if you are getting a hard money loan, the lender isn’t going to give you a copy of their bank statement to prove they have the cash you need.
The proper way to handle it would be to make the offer showing that you are using a hard money loan to buy the property. Hard money is still a loan and a pre-approval letter is needed to go along with your offer. It may need to say something about the condition of the property not being a problem. A properly worded pre-approval letter can make all the difference in the world in getting your offer accepted.
Another important key is that the loan officer who wrote the pre-approval letter has to be available to talk to the listing agent before the offer is accepted. This can be the final requirement before an offer will be accepted.
So even though hard money is similar to cash and can be almost as fast, it is not the same.
ITIN is the abbreviation for Individual Tax Identification Number. It is the number issued to individuals who do not have or are not eligible to have a Social Security Number. They are used by individuals without Social Security Numbers for federal tax filing purposes with the IRS.
Banks don’t typically lend to those who have an ITIN. This isn’t because they aren’t eligible to buy property or get a mortgage. There is no restriction on buying a home just because one has an ITIN. Banks just don’t lend to them.
The most common solution for someone with an ITIN to own real estate is through private money loans (aka hard money). This is because private lenders aren’t so worried about the little details the banks focus on. Instead, they look more at the property value and the down payment than anything else.
Another big problem for many of these buyers is that they don’t have sufficient credit. Often, they think they can’t get any kind of credit unless they have a social security number. This is completely untrue. I have worked with many clients who have well established credit that they used their ITIN to get.
(For more information on credit and how to establish it, go to CrackMyCredit.com.)
Fortunately, private lenders aren’t as worried about credit as the banks so even if you have no credit at all, that shouldn’t stop you from getting a mortgage to buy a property.
The only real requirement for buying a property (other than having the money or getting a loan to buy it) is that you have to be able to prove your identity and you have to be able to prove where the money came from. In other words, just because someone has an ITIN is no reason they can’t own real estate.
This is part 2 of 2 in a short series to clear up some of the questions and misunderstandings regarding owner occupied hard money loans. In this post, I will cover bridge loans and temporary loans.
Bridge loans are fairly well known, at least in terms of the name, if not what they actually are. Temporary loans are similar to bridge loans but not exactly the same thing.
A bridge loan is specifically a loan that is used to buy a property before selling another one. These are short term loans, usually no more than 12 months. There are three basic ways to set on up.
The first way is to use both properties as collateral for the loan. The second is to use only the property already owned as collateral. The third is to use only the property being purchased as collateral. Deciding which option works best for you is something you may need your loan officer to help you with.
Whenever a bridge loan is done, an exit strategy is needed because the lender wants you to have a plan of how you will pay off the loan. They don’t want to foreclose any more than you want them to foreclose.
There can be many valid exit strategies. Probably the most common is to sell the property you already own. In the case where this strategy is used, the entire loan can be paid off from the sale of the property. In some cases, there isn’t enough money to pay off the entire mortgage so a new smaller mortgage is needed at the time of the sale.
Your loan officer should be able to help you figure out your ideal exit strategy and even if you already have it worked out, it is a good idea to go over with him or her to make sure it is workable.
Temporary loans are also short term, just like bridge loans, but they have a different setup and a different purpose. When you have enough equity in your property, are unable to get a loan from a bank and need a short term solution, a temporary loan may be an option.
They are typically setup with no more than a 12-month term and, if the property is your primary residence, there is no prepay penalty allowed.
Regardless of the reason for needing a temporary mortgage, whether it is due to bad credit, income that can’t be proven or a property that won’t qualify for a bank loan, the biggest factors in being able to get approved for one are the equity in a property and having a good exit strategy.
There has to be enough equity in a property to give the lender the comfort to not worry about their investment in lending you money. They have to have confidence that if anything goes wrong, they won’t lose money. You should also want this because you want to make sure you have the ability to pay off the loan and your equity can play a big part in that.
A good exit strategy is one that has a reasonable likelihood of working to the benefit of all. Once again, the exit strategy is something your loan officer should be able to help you with.
I could go on for days explaining all the different ways these loans work but rather than doing that, if you have questions about it, please call or fill out the contact form on our site.