If you are suffering from a poor credit rating and striking out with traditional lenders as you seek to buy a home, you might want to consider getting funds from the increasing number of hard money lenders that are doing business.
How Exactly do Hard Money Lenders Operate
A hard money lender is a lending company or individual that offers a short-term loan (often called a “bridge loan”) based on the value of real estate that has been used as collateral for the loan.
The trick with these lenders is that their interest rates will be far higher than those offered by traditional lending companies because they dare to venture into deals that banks won’t touch.
In our current era of massive foreclosures, hard money lenders have sprung up like mushrooms as they look for foreclosed homes that need a little work, then provide the money for that fix-up as the home is re-valued at a far greater level.
So, if you don’t have a lot of money on hand and are open to overseeing the renovation of a foreclosed home that has sat idle for months, you might be able to find someone to fund your gamble.
Hard money loans for bad credit usually have a substantial set of requirements, including a set loan-to-value percentage, a certain type of real estate and a minimum amount for the loan. All of these could shut you out, but it’s worth a try if you have not been able to obtain a loan through more traditional channels.
Perhaps the best feature of a hard money loan is the rapidity of the funds disbursement. Loan companies often don’t have to play around with paperwork or bureaucracy; they can get the money to you in a few days, not weeks or months.
Word of Caution
If you do decide to play with this type of loan, be aware of these differences in how lenders do business:
- Hard money lenders will not allow you to miss their payments and stay in the house. They will not be as patient as traditional mortgage companies. They have no interest in keeping deadbeats in homes, and they have risked enough to be stern with their terms. If you bite off more home than you can chew, you might be on the street after missing one month’s payment.
- Some states don’t allow hard money lenders to operate, or they greatly restrict their operations. Check to make sure that such lenders are in business where you live.
- Many of these companies also have stiff pre-payment penalties. Try to find one that does not have this penalty, in case you are able to pay off your loan early as you rebuild your credit score and your life.
A “nothing down” loan from a hard money lender might get you into a home, even if you have bad credit. You can find out who the lenders are in your area by talking to a mortgage company, a title company, a real estate agency or by looking online.