How To Apply For Hard Money Loans For Bad Credit
When it comes to financing, hard money loans usually don’t have the best reputation. While some of this ill repute is warranted, they do offer individuals with poor credit history quick access to funds when their applications have been rejected by traditional lenders.
Today, we’ll discuss what this lending product is and how those with poor credit can get approved for it.
What Is A Hard Money Loan?
This lending product is an alternative type of financing offered through private lenders or individuals. It requires the borrower to pledge real-estate or property to secure the funds. Should the borrower default, the lender has the legal right to repossess the pledged asset and liquidate it to cover the remaining balance.
Since the 2008 financial crisis, many new regulations were passed that limited hard money lenders from charging exorbitant interest rates and fees. Even though these loans are considerably less predatory now, they still carry high-interest rates and can be quite expensive for the borrower.
This lending product is often considered to be the last resort option for those in need of fast cash. That being said, some people and organizations use this financing to develop and sell a property for profit.
How Do Hard Money Loans Function?
These lending products are most commonly sought out by individuals who don’t qualify for a traditional loan or mortgage at a bank. In this case, one may seek out a hard money lender. This financing option then requires that an individual use his or her property to guarantee the borrowed funds.
It’s essential to understand that most of these lending institutions will only offer a loan-to-value ratio (LTV) of 50% to 70%. LTV is a metric used by a lender to express what percentage of an asset's value it’s willing to lend out.
For example, let's say an individual approached a hard money lender hoping to use his or her $125,000 property as collateral. If the lender's max LTV ratio is 65%, it means that the borrower can receive, at most, 65% of the value of the home. In this case, that lending amount would be $81,250.
Furthermore, these lending products usually carry short-term lengths of one to seven years and are subject to interest rates that range from 7.5% to 18.0%.
How To Get Approved For A Hard Money Loan With Bad Credit
Unlike traditional lenders, hard money lenders aren’t overly interested in how likely an applicant is to pay back the debt. In some cases, these lending institutions won’t even ask to see an individual's credit report. Instead, they’re interested in the value and legal standing of the asset being used to secure the financing. Because of this, one's credit score has little to no impact on whether an applicant gets approved.
Approval ratings run high for this type of lending product. It’s also why this financing option is often sought out by individuals with a highly damaged credit rating.
Alternatives To Hard Money Loans
- Personal loans: Although applicants may have been denied a personal loan from a bank or traditional lender, it doesn’t mean their only remaining option is a hard money lending product. Over the last decade, the rise in popularity of online lenders has produced several reputable companies who specialize in working with individuals with a poor credit rating
- Secured personal loan: Those who are considering this type of financing are doing so because they have some type of asset, typically property, that they can use to secure the funds. Those in this position should first explore a bad credit secured personal lending product. Although interest rates might still be high, the tenure will be longer, and the chances of default can be better managed
- Equity-based loan: Those who have a property to pledge for this type of lending product should consider exploring traditional equity-based options first. Such options include a HELOC, a cash-out refinancing, or a mortgage refinancing. It’s important to understand that these options are only available to those who have sufficient equity in their homes and aren’t suitable for those with low home equity
The Bottom Line
Hard money lending products are a form of asset-backed financing offered through private lenders. They carry high interest rates and short-term tenures. Additionally, they’re expensive in the long run if improperly managed.
Hard money loans for bad credit borrowers are common throughout the lending industry. Even though this financing is often used by those in a tough financial spot, some developers and builders seek them out as well.