Low Interest Rates, Unemployment below 5%, housing prices increasing by 5% and the improving economy are assisting borrowers improve their credit scores. The share of U.S. adults with credit scores that are considered “subprime” fell to 20.7% in April, the sixth consecutive year-over-year decline and the lowest level since at least 2005, according to the Wall Street Journal. The ranks of subprime borrowers swelled during the financial crisis, peaking at 25.5% in 2010 as mortgage payments, credit-card bills and other debts went unpaid. Credit Scores may be improving but finding and qualifying for a conventional real estate loan is still out of reach for many borrowers. Hooray for Hard Money Loans!
While there are many reasons a Real Estate Investor, Business Owner or Self Employed borrower might need a Hard Money Loan, impacted credit scores and the inability to qualify for conventional Government financing is a primary driver. For those 20.7% of real estate borrowers in the “below subprime” category, hard money loans provide an excellent path to investment, returns and an improving credit profile. Today’s Blog will explore important considerations for those with bad credit who want to obtain a Hard Money Loan.
The primary reason why individuals with Bad Credit qualify for hard money loans is because Hard Money Loans look to the equity in the property rather than the Credit Score as collateral for the loan. Typically, a government loan will provide 80% loan to value at a minimum, however qualifying borrowers have to prove their income through tax returns and have a qualifying Credit Score typically above 600. Hard Money lenders will usually loan at 65% loan to value and will work with lower credit score borrowers below 600 and leverage the extra 15% (80% – 65%) equity protection.
Another important factor that allows credit impaired borrowers to get a Hard Money Loan is a borrower’s “Skin in the Game”. Borrowers who have 35%+ of their own capital in a real estate investment will work hard to make sure the payments are made on time.
Additionally, Hard Money Lenders will look at a borrowers Credit Report differently than a conventional lender. Here are some of the ways that Hard Money Lenders treat Credit Scores and Credit Reports:
- Number of Missed Payments: All missed payments are not equal. Sometimes missed payments can be discounted if there was a good reason or cause. A good example of legitimate missed payments may be a severe medical event that sets a borrower back initially but can be recovered from later.
- Types of Missed Payments: A missed mortgage payment or a series of missed mortgage payments more pertinent to hard money underwriting than a missed credit card, medical or car payment.
- Trending Credit Report Data: New Credit Reports look at Trending Credit Data and a borrowers trending credit and track record may be considered in hard money loans
- Letter of Explanation: A letter of explanation from a borrower goes a long way in helping a lender understand the specifics of a credit impairment event
- Credit Repair and Counseling: Getting a borrower signed up for Credit Repair can help a Hard Money Lender feel more secure about providing financing knowing that the borrower will potentially a conventional loan as the exit strategy.
Do you have bad credit and need a real estate loan? We would like to know. Please submit a post on our Mortgage Vintage, Inc. Facebook Page or our LinkedIn Company page. If you enjoy discussions like this, please sign up for our Linked in Group called Southern California Trust Deed Investment Group.