A lot of people think that, if they have bad credit, there are no finance options available to them at all anymore. However, it is interesting to note that hard money loans are less interested in credit scores and more interested in a number of other things. While there certainly are significant disadvantages to taking out a hard money loan, the fact that they are available for people with bad credit makes them very interesting.
The Problem with Institutional Lenders
A lot of people think that the world of mortgages is dominated by banks and other forms of traditional and institutional lenders. In reality, this is no longer the case as non-traditional lenders begin to take over the financial system.
In 2011, 50 percent of all new mortgage money was loaned by the three biggest banks in the United States. At the same time, six of the top 10 largest lenders by volume were non-banks.
Traditional lenders usually lend between 80% and 90% of the value of a property. However:
They only look at a property’s purchase price, not its potential.
They don’t provide mortgages for distressed or vacant properties.
They care mainly about the credit score of the applicant, rather than the money to be made on the property.
The Hard Money Lender Experience
Hard money lenders also care about credit score, but not much. Their underwriting process is very different, however.
Hard money lenders are primarily concerned with the amount of equity the borrower has invested in the property that will be used as collateral. They are less concerned with the borrower’s credit rating. Issues on a borrower’s record such as a foreclosure or short sale can be overlooked if the borrower has the capital to pay the interest on the loan.
What a private lender is interested in is what a property will be worth after repairs. They are also more interested in whether a borrower has any real estate investing experience. Finally, they want to see people who are happy to put their own money into the pot. Naturally, a good credit rating helps in all of that, but it is not the be all and end all of the process.
How to Get a Hard Money Loan Approved if You Have Bad Credit
If you do have bad credit, then the following tips may be of benefit to you in order to increase your chances of approval:
- Focus on due diligence. Make sure that you write a stellar proposition that they simply cannot say no to, by covering every angle.
- Provide an explanation as to why your credit score is less than perfect. Explain the things that have gone wrong in the past and what you have done to ameliorate the situation.
- Try to give the private lender peace of mind. You need to showcase that it is also in your interest to have a successful project. To prove that you believe in your proposal, you should put as much of your own money towards it as you can. You also need to write an exit strategy and explain how you intend to repay the loan.
As you can see, it is possible to get a hard money loan even if you have bad credit. While that doesn’t mean your credit score doesn’t matter, it is more a case of other things being far more important. That is one of the main things that set private lenders apart from traditional institutions. A hard money lender wants to invest in projects that look profitable and likely to succeed. Hence, they will look at each proposal individually, rather than having a tick box exercise like traditional lenders generally do.
With the economy the way it is, California Hard Money Lenders are poised to profit and pounce on a market that’s growing more and more disenfranchised with the traditional bankin...