Bad Credit? No Credit? No Money? No Problem!

Have you ever walked into a bank or mortgage brokers’ office to apply for a mortgage loan and was told, “Your credit doesn’t meet our guidelines?” Or already better, “you don’t have enough money for the down payment.” How about, “You don’t have a long enough credit history for us to tell if you are a viable risk or not. Come back in a few years after you have established your credit.” Yes? It’s not surprising. A staggering 25% of mortgage loan applicants in seven different cities were denied loans due to “credit issues.” In another seven cities, collateral and down payments were 10% of the problem. In fact, approximately 70% of the population has or has had credit related “issues” in their past that have negatively affected their credit scores. That’s right, 70 percent! If that’s not a trend or niche staring you right in the eye, we aren’t sure what is.

No one wins when a loan applicant is turned down. The bank loses prospective interest income, the borrower gets a bad taste in their mouth from the institution and possible observe buyers don’t get the opportunity to buy income producing loans.

From these statistics and revelations, a whole new kind of real estate lending has evolved and is becoming increasingly popular with individuals or companies who need the flexibility and speed of the private lender. Hard, or private money, lenders are private individuals, or sometimes small companies or partnerships, with monies obtainable for investment. Based upon their personal criteria and guidelines, they tend to lend chiefly on a short-term basis, to real estate investors who use it for a variety of profitable purposes, but most commonly, buying and repairing distressed character. What does that average to you as a possible Buyer? Most hard money lenders are most concerned with the value of the character, placing less emphasis, if any, on the credit of the Buyer.

basically, they want to be assured that if the Buyer defaults on the loan, they will possess an asset that can be foreclosed on to retrieve their original investment and nevertheless turn a profit. Hard money lenders do not want your character via foreclosure, they just need to feel obtain in lending their money on an asset that may be easily liquidated in the event of default by the Buyer. This all may sound too good to be true, but don’t be fooled. Hard money lenders are slightly difficult to find and come at a steep price. Terms for these types of loans will vary from lender to lender and will depend upon the experience level of an investor, the character itself and the length of an investor’s relationship with a particular hard money lender. Generally, a private lender will provide a loan for 50-70% of the after-repaired value (ARV) of a character at an interest rate of 12-18% for a period of 6 months to five years. In addition, they will also charge between 2-10 points as an upfront financing fee to the Buyer. The terms will vary from interest only to fully amortized loans. Some will incorporate rehab money into their loans while others will not. Some will place the repair money in escrow to taken in draws as work is completed, while others will let you leave the table with the complete amount in your pocket. Ultimately you will need to complete your due diligence and determine what the exact programs and/or guidelines are for a particular lender and determine how they fit into your investment plan. Coupled with terms and equally as important, lending guidelines will also vary among lenders. Each will have their own preferences with regard to geographic area in which they will lend and types of investors to whom they will lend. Other varying guidelines that you will find are credit checks, appraisals, inspection fees for construction draws, and most importantly shared sense. Some hard money lenders are strictly numbers kind lenders, while others go with their gut feelings about you and the deal. Keep in mind that most hard money/private lenders are individuals just like you. They are not institutional investors who have standards and guidelines dictated by the federal reserves. They can be as flexible or as inflexible as they desire. They can be your neighbor, your doctor, your attorney, or your accountant. They usually don’t advertise that they lend money, but instead value referrals and keep their heads low.

Finding true hard money lenders really isn’t difficult if you really think about it. Who closes the loans? Who draws up the loan paperwork? Who disperses the funds? Who insures the similarities? Who sells the similarities? Settlement agents, attorneys, accountants, insurance agents and real estate agents are some of the greatest supplies for hard money lender referrals. In fact, some of the professionals you talk to may already be private lenders themselves. Insurance agents who sell danger insurance policies always place what is called a mortgagee clause in all of their policies when a lender is involved. The mortgagee clause will list the lender. An active agent could become a very good supply of private money lender names for you. Mortgage brokers can also be a good source for locating hard money lenders, particularly those that work with investors on a routine basis and specialize in investor loans. You may have to pay the mortgage broker a fee for the referral because he is giving up his commission with you going directly to the source, but it is well worth the money if it method getting your deal funded.

A slightly more involved method of finding hard money lenders is to excursion the neighborhoods and write down the addresses of the homes undergoing renovation. Take the addresses to the courthouse and pull the deed and observe for the each character. at the minimum one out of ten similarities will be funded by a private lender and not a Bank or institution. Contact the lenders that you discover and explain that you are beginning to invest in the area and would like the opportunity to run some of your deals by them. More times than not, they will be more than willing to take a look at any deal you may have.

Hard money lenders are great resources for real estate investors, particularly a beginner with limited resources. Having a hard money lender on your team enables you to confidently make offers on similarities, knowing that the funding is there when you find the right character. The single biggest obstacle that keeps most beginning investors from taking the jump and making offers is cash. By having a private lender already willing to give you the cash, finding a great character becomes your only focus and propels you forward. In addition to securing the funds to buy character, another extremely important reason to find and befriend hard money lenders is that hard money lenders will be your best and most reliable resource in ensuring that your deals close when you sell homes to other investors. Your ultimate goal is to become the bank. Many prospective buyers for your similarities are not all cash buyers. In reality, most cannot simply write a check from their bank account, but rather must borrow their money from other supplies. If an investor doesn’t have a authentic source of funds when they bring you an offer, then it is your job to screen them a little further to determine if they qualify for one of your private money lenders programs. Many are capable of making mortgage payments and completing a rehab and would love to buy your similarities if they could come up with the cash. In this case, it is your job to take control of the deal and rule them to the money. Become the bank in addition as the provider of the character, but be careful. continue control of the transaction and use some discretion in deciding whom you take to your lenders. You don’t want to burn bridges with your lenders by introducing them to deadbeat buyers who default regularly. Ultimately, you want to be able to take anyone who wants to buy a character from you to one of your lenders. You can quickly develop a list of investors who buy from you on a regular basis when you can provide the character and the financing.

To wrap it all up, let’s run by a quick scenario of buying a character with a hard money loan. We won’t go into the details of the paperwork and submitting the deal itself as this all varies from lender to lender. We will stick to finding and analyzing the deal. Okay, let’s get started. by your various methods of prospecting, you find a house that is offered at $60,000 in a neighborhood that you feel, and confirmed by your investing team of Real Estate Agents, could sell repaired, painted and in move in condition for $100,000. Keep in mind that we are pulling the numbers out of the air. Your area may be less expensive or quite a bit more expensive, but the formula works the same. You found a hard money lender that you have begun a relationship with, prior to finding a character, that will lend you up to 70% of the ARV (After Repaired Value). You have your contractors’ give you rough estimates of approximately $10,000 in repairs to bring the character up to move in condition. Your settlement attorney or closing agent gives you an calculate of $3000 in closing costs. Let’s see what we come up with. $100,000 buy price x 70% (the most the lender will lend on the ARV) = $70,000. $70,000 – $10,000 in repairs – $3,000 in closing costs = $ 57,000 (your maximum buy price). Anything negotiated over this figure is going to have to come out of your pocket.

There are a few real good investment analyzing tools that are used by some of the most active investors out there. You can get one of them for free by visiting The others that are used are also connected from the website. The website also has an e-Book entitled “Top Secret: America’s Most Liberal Lenders,” that may be purchased. The e-Book has already sifted by the masses and has put together some of the top hard money lenders in the nation for you, saving you large amounts of time. As always, I am always happy to answer any questions via email at [email protected] Happy investing!

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