Most people think that hard money loans (also known as private money loans) qualify as creative financing. But the truth is that just because a loan is hard money, it doesn’t mean that it’s creative.
Someone who has bad credit or a property that is in poor condition will probably have to use hard money for a mortgage. But it can be pretty straightforward and doesn’t need to be creative at all.
If you look at the facts, getting a higher interest rate and probably paying more points than you would for a different type of loan doesn’t seem very creative.
So what does a creative loan look like?
One example that we just closed this week involved a guy who wanted to buy a property but didn’t have any money for a down payment. And since there aren’t any loan programs for buying a rental property with no money down, most loan officers would have turned him down.
But that isn’t what happened.
It turned out that he owned another house that had a lot of equity in it. So instead of turning him away, we used that equity so he could buy the house he was interested in. The loan used both properties, being a first mortgage on the one he was buying and a second mortgage on the one he already owned.
Another example is a borrower who needed to refinance a property that had major fire damage. The property had 3 units before the fire and two units afterwards. Obviously, no bank would give anyone a loan on that property.
But we came up with a solution to it. Instead of going through the complicated process of doing a construction loan, we had the property appraised based only on the two remaining units.
Since the loan was based on the as-is value, there was no need to have any money held back to cover construction costs. The borrower had been looking for a solution for a while and was unable to find anyone to help them. Fortunately, the solution seemed pretty obvious to us and we got the loan done quickly.
There are many other examples of how to take a situation that doesn’t seem to have a solution and figuring out a way to be creative, coming up with a simple solution to get the problem handled.
So when you think of creative financing, it isn’t true that all hard money is the same. It is important to find someone who cares enough to look for the solution to your problem, whether that person needs to be creative or not.
The best way to look at it is to find out if there is a simple solution. Complicated doesn’t usually work and causes confusion. Simple is almost always better.
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.
There are certain attributes I have found in successful hard money investors. Following are some of the key characteristics that are common to many of them.
The very first thing that is noticeable about successful investors is that they are decisive.
They make decisions fairly quickly and commit to doing the loan or not doing the loan. At the same time, they are often willing to change their mind when new data is provided or when the terms of the loan change.
To be decisive, an investor needs to be trained in how to analyze deals. Often, this is done with a mentor because there aren’t a bunch of seminars on how to become a hard money investor. The mentor could be an experienced investor or it could be a broker who arranges hard money loans.
The second thing is that they realize they are dealing with people who can’t get a loan from the banks so they don’t try to underwrite to bank guidelines. The banks offer lower interest rates because they have stricter underwriting guidelines. They also offer loans that require less protective equity than a private investor, sometimes doing loans as high as 100% of the property value.
Getting hard money rates requires a loan to have some problem that a bank can’t work with. It could be bad credit, a property in disrepair, inability to prove income or something else. Any private lender who wants a perfect file but wants higher rates is going to be disappointed. Files that are closer to bank guidelines will be taken by other investors who will do lower rates.
The third characteristic of successful investors is that they have developed somewhat of a system for choosing which loans they will do.
Each investor has their own preferences. Some will only do loans with certain rates offered. Others lend on properties they wouldn’t mind buying for the amount the are lending. This is actually a pretty good way of looking at it when you consider that if the borrower defaults, the investor could end up with the property.
Location can be a consideration too. Some successful investors like to be close enough to a property so they can drive to it. Others lend in areas they have some familiarity with. There are also some who will go further outside of their area when there is a full appraisal and the loan-to-value ratio is low enough for their comfort.
The fourth characteristic of successful investors is that they look at it as a business. Lending is not personal to them although they don’t want to foreclose on anybody. Their intent is to make a profit by helping someone who needs money from them.
Any successful business transaction is a win-win. Both the buyer and the seller, or in this case borrower and lender, benefit from the transaction. Keeping this in mind, they don’t assume the borrower is hiding something when an application is poorly done. Instead, they ask for the missing information that they want. Not jumping to conclusions but asking questions to get additional data allows them to do more loans and avoid the ones they shouldn’t be doing.
In summary, successful investors are professional at investing, having a system for analyzing and saving information as well as being knowledgeable enough to change their minds when additional information or changed circumstances are presented.