If you are in the market to buy a fixer-upper home and have credit issues, you may find it impossible to find financing. Before you give up on your dream, consider the hard money rehab loan. While we know the term ‘hard money’ instantly gives you negative connotations in your head, don’t worry. They aren’t the ‘back alley’ type lenders that use any means necessary to get their funds.
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Today, hard money loans are those provided by private investors or sometimes a combination of several investors. These loans don’t have to follow any regulations like
conventional and government-backed loans must follow. This gives you a bit more leeway in qualifying for the loan.
How do you Qualify for a Hard Money Rehab Loan?
Unlike conventional and government-backed loans, there aren’t any written in stone requirements you must follow. Each lender can have their own requirements for each loan. Typically, the largest requirement for any hard money rehab loan is the value of the property. If you buy a run-down home, the lender may look at the after-repaired value rather than the as-is value when determining a home’s worth. This gives the lender an idea of the amount of collateral you have to provide should you default on the loan.
This doesn’t mean hard money lenders won’t pull your credit – many still do. They probably won’t expect to see ‘great credit,’ though. They will expect things like short sales, foreclosures, or bankruptcies. If you didn’t have these things on your credit, you would likely be able to apply for a conventional or
FHA 203K (rehab loan).
Hard money loans are typically for those borrowers that have the capability of affording the loan, but were turned down by the bank due to poor credit and/or a high debt ratio.
What are the Hard Money Loan Terms?
The terms hard money lenders require will vary by lender. If you don’t like the terms one lender provides, try another. Typically, though, hard money lenders provide ‘temporary’ financing. In other words, it’s not meant to be a 30-year term for an
owner-occupied property. Instead, it’s money to help you buy a fixer-upper, fix it up and sell it for a profit.
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You’ll usually find that hard money lenders offer terms varying between 12 months and 5 years at the most. Some lenders allow interest-only payments with a balloon payment required at the end of the term – usually fairly soon, such as 12 months. Other lenders require full principal and interest payments.
The Process of Obtaining a Hard Money Rehab Loan
So how do you get this hard money rehab loan? The process will work much the same as a bank loan. The lender(s) will need to know about you and your financial situation. The best way to do this is by getting prequalified. In discussing your situation with the lender, they will assess the situation and determine if they are willing to take on your risk. At this point, the lender will tell you what they need in order for you to qualify for the loan.
Once you know you can secure lending, you can start searching for a home. Keep in mind the requirements the lender provided you so that you can still secure the financing. If they had any particular issues with rehab homes, keep those at the forefront of your mind. Some lenders are only comfortable with moderate renovations while others are fine with a complete renovation of an entire home.
Once you secure a purchase contract, you can start the work with the hard money lender. You’ll need a good idea not only of the value of the home, now, but also the after-repair value. A qualified appraiser can help you with this step. The lender will then continue processing your loan, which usually doesn’t take long after you secure the appraisal.
The final step is closing on the loan and following the hard money lender’s requirements. A
title company will close the loan, just like they would a bank loan. You’ll sign a deed and money will exchange hands via the title closing agent.
The hard money rehab loan is a great way to get the funds you need to build an investment home portfolio. It isn’t the type of funding you’d want to use for an owner-occupied property and most hard money lenders wouldn’t allow that type of ownership either. It’s a way to get temporary financing, but not long-term financing. Make sure to shop around to find the deals that are best for you as the terms, rates, and costs are not as regulated as standard mortgage loans.
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