How to Get a Hard Money Loan with Bad Credit

Hard money lenders are not usually worried by borrower qualifications such as debt-to-income ratios and credit scores. The property serves as collateral on the loan. If you default on the loan, the lender will take and sell the collateral to recoup its money.

Even with bad credit, you can still qualify for and get a hard money loan. Your creditworthiness does not play a significant role in qualifying for a hard money loan.

A faster turnaround is possible with hard money financing. There is less risk for the creditor and you can close these loans in a matter of a few days.
A hard money lender will also consider your home equity, debt-to-income (DTI) ratio, and loan-to-value (LTV) ratio before approving a loan. 

They typically require at least 10% of your own money as down payment. Your track record with real estate investing will come in handy. If you plan on renovating and selling a property quickly, consider getting a hard money loan. 

Hard money underwriting guidelines focus on equity not on borrower credit.

The most important factor for hard money lenders is the value of the collateral that secures the loan. They accept borrowers with low credit scores, prior bankruptcies, and foreclosures. The property acts as a guarantee. Once approved, hard money loans can be issued very quickly. 

What is a hard money loan?

A hard money loan is a short-term commercial financing issued by private investors or lenders that is secured by real property.

Hard money loans are mainly used in real estate transactions. These loans usually have shorter terms and higher interest rates. The asset being bought is used as the collateral for the loan. This reduces risk for both the borrower and lender.

These loans typically last 1 to 3 years and are used as a way to quickly collect money. Hard money lenders do take into account the borrower's credit score, income, and experience.

The hard money lender takes on more risk. Hard money loans have high interest rates and lenders may require large down payments. The loans also tend to have short repayment periods.

Hard money loans come with a fast and less stringent approval process. They are ideal if you need to make the purchase quickly. The loans are often considered loans of last resort. A borrower must consider all associated risks before deciding what is right for them. 


How a hard money loan works?

Hard money loans can be approved and funded within days. The loan term can last from a few months to several years. 

Interest rates are typically high compared to alternative loans. Borrowers make regular monthly payments on their loan, including interest and fees.

Once the property is sold, the borrower pays the remainder of the loan, covers the closing costs, and keeps any remaining funds from the sale as profit. 

Most hard money lenders expect interest only payments monthly, while the loan is outstanding.

Some may allow the interest to accrue, and not require it to be paid until the sale is complete. 

Ask your hard money lender if you can wait to pay the loan interest until after you sell. 

Hard money lenders often evaluate the strength of the deal, and the reliability of the borrower before giving a loan.

The loan will be approved if the purchase and repair cost vs. the resale value is good, and the borrower is trustworthy. 

The lender will hold the first position lien on the collateral until the borrower repays the loan.

Hard money loans have terms based on the value of the property used as collateral. The higher cost of a hard money loan is offset by the quick pay off period. 

Most hard money loans are for one to three years. Hard money lending can be viewed as an investment.

The cost of a hard money loan is much higher. The loans have faster closing times, and offers flexibility for an investor who needs to close quickly, or has a low credit score. 

Before taking out a hard money loan, consider the financing cost and whether it is worth it. Ask your lender about the guidelines and loan funding process. 

Having an established relationship with the hard money lender will allow you to close deals faster when you need to. 


office blocks
office buildings

How to qualify for a hard money loan

Even though your credit score doesn’t qualify you for the loan, a good score assures a hard money lender that you are a low credit risk. 

Most hard money lenders require proof of your qualifications as a successful real estate investor.

This will improve your chances of loan approval and get you a favorable interest rate. Hard money lenders also require property insurance (a builder’s risk policy). 

If you can find a reputable lender with good terms, hard money loans can be a good idea.  


Hard Money Loan Approval Guidelines

Hard money lenders don't have the same underwriting process as banks. The lender is focused on the deal and will make a decision based on your answers to;
  • Are the financial costs appropriate?
  • Is there a purchase discount?
  • Are the renovations properly budgeted for?
  • Is the after-repair value (ARV) true?
  • Can the property be sold for a profit?
  • Can the borrower repay the loan on time?
A hard money loan can get approved and funded in 7 to 14 days.


  • Credit checks
A hard money lender will probably do a credit check on you. They look for a minimum credit score of 600 to 620. The main concern is to check if a borrower has many debts or loan defaults.

  • Property value
The value of the property is of concern in the underwriting process. Hard money loans are riskier for the lender. The property will be appraised to verify the true value and time for resale. Hard money lenders prefer quick selling properties.

  • Exit strategy
The lender has to consider the borrower's exit strategy. Can the borrower pay off a balloon payment at the end of the short term? They may also require a higher down payment to limit their risk. Some hard money lenders offer long-term loans on investment properties with 5 or 10 year terms.

  • Experience
Hard money lenders prefer borrowers who have completed at least some real estate deals.

  • Local market
Some hard money lenders prefer to operate in local markets.

  • Loan funding timeline
The underwriting process is focused on the property value. Hard money loans are often approved within 48 hours in many cases. The underwriter will have to get approval from the hard money investors once the process is done.

Hard money lenders are limited to their own funds from private investors. Once the loan is approved, the lender orders an appraisal. 

The loan can be closed within days of the appraisal being completed. A hard money loan can be funded in 7 to 10 days, depending on the appraisal time.  

How is the loan-to-value (LTV) ratio determined for hard money loans?

The loan to value is determined through an appraisal or a broker opinion of value. A broker can be hired by the lender to assess and estimate the potential appraisal value of a property. 

The brokers assist with the hard money approval process, and can provide quick answers than a traditional appraisal.

The higher the loan-to-value ratio, the riskier that loan is for the lender. Borrowers with a strong credit history and a promising investment, get high LTV ratios. 

Hard money lenders comprehensively evaluate the investment potential of a property and the likelihood of a successful outcome.

On average, a hard money loan borrower can get 65-75% of the property value. Most hard money lenders keep the ratio of the loan value to the value of the home relatively low.

The loan-to-value ratio (LTV) is calculated by dividing the loan amount by the property value. The higher the ratio, the more risk to the lender. The higher the risk, the higher the associated fees and interest rate.

Some hard money lenders calculate the loan-to-value ratio based on the property’s current appraisal, while others choose the after-repair value (ARV). 

The after repair value increases the loan-to-value ratio, signifying a riskier loan and much higher costs.

Ask your hard money lender if they use the current property value or ARV. A full appraisal is costly and can slow down the loan approval process.  


apartment building
skyscraper

What fees do hard money lenders charge?

Hard money lenders charge monthly interest of around 8% to 15% on loans. Borrowers pay the monthly interest until the investment property is sold. 

The duration of interest payments is determined by the time it takes to do any renovations, list the property, and close a sale.

They also charge an origination fee between 1% and 10% of the loan amount. This fee covers the administrative costs associated with the loan.

Many hard money lenders also require a down payment on the property. This can be around 20 to 30% of the total cost of the property.

In summary, common fees for a hard money loan include:

  1. Origination fee.
  2. Broker fee.
  3. Application fee.
  4. Underwriting fee.
  5. Documentation prep fee.
  6. Processing fee.
  7. Funding fee.
These fees are often paid up front. The convenience and easy approval of a hard money loan comes at a cost. 

Because hard money financing is considered riskier, lenders charge more to hedge their loans.

Rates vary based on the lenders and the borrower’s situation. Interest rates also differ based on competition. 

There are also upfront fees that a hard money lender will charge to cover the cost of loan processing and any commission payments.

Look out for predatory practices, excessive costs, and fees before you sign a hard money loan contract. 

Do not agree to work with a hard money lender if you feel you may have a difficult time repaying the loan. 



Where to find hard money lenders

One place to find a hard money lender is online. You can also ask for references and call them. 

You can also contact institutions specializing in hard money lending. A quick online search for hard money lenders can reveal lenders in your local area.

Local real estate agents and investor groups are a good source for hard money lenders. 

Reach out to several lenders, discuss your needs, and develop a relationship. It helps to shop around since hard money loans are less regulated. 

You may find lower rates or negotiate different terms with different lenders. 


hard money vault
real estate

What are hard money loans used for?

Hard money financing is used by real estate investors seeking short-term funding for an investment deal.

Here are some common uses of hard money loans.

  • House flipping
Because these projects happen fairly quickly, professional house flippers often prefer faster forms of financing. Real estate investors who buy, fix and flip houses for profit may use hard money loans.

  • Investment property
Investors who want to invest in rental property but don’t qualify for traditional loans may use hard money loans to pay for their investment.

  • Commercial property
A business owner may use a hard money loan to purchase a commercial real estate. 

Hard money loans can be useful for buying a property that doesn’t qualify for conventional financing. 

Those who find traditional commercial loan limits to be insufficient for their needs may also use hard money loans.

A hard money loans can also be used to bridge the gap between an investment property purchase and longer-term financing. 

Buy-and-hold rental property investors use hard money to acquire and renovate a property. They then refinance the debt with a traditional lender to pay off the hard money loans. 


Advantages of hard money loans

  • Lenders and borrowers can close deals quickly.
  • Loans are backed by property value.
  • Bad credit or no credit isn't a consideration for loan approval.
  • Hard money loans require a lower loan-to-value ratio
  • Can be used to fund an investment while securing longer-term financing.
  • Faster loan approval process
  • Approval based on property, not credit history
  • More flexible than traditional loans 


tower
house flipping

Disadvantages of hard money loans

  • Higher interest rates.
  • Additional fees are common.
  • Expensive short-term financing with less time to repay.
  • The lender holds the property deed as collateral for the loan collateral.
  • The lender will require expensive builders risk insurance
  • Often require large down payments.
  • Loan amount may not be sufficient in case of unforeseen expenses.
  • Riskier than traditional financing.
  • May need to have proven record of successful real estate deals. 


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