The money-making potential of real estate investing is immense — if you know what you’re doing.
However, the inability to secure a loan for real estate investments is one of the biggest obstacles new and seasoned investors alike might face. If you have poor credit or little cash on hand, it can be difficult finding loans that will suit both needs – which eventually leads many people into bankruptcy if they don’t find other funding soon enough!
Despite this, there are still ways for you to get in on the action in the housing market even if your credit is not perfect and your cash reserves are not enough.
Why Good Credit Is Important When Securing Real Estate Loans
The first thing a lender considers when deciding whether to grant you loans is your credit score. Credit scores are based on the information requested by the lender from one or more credit bureaus that you have engaged with. This score determines how reliable and trustworthy you have been in past transactions. It also allows lenders to evaluate how well you maintain your finances and whether you will be able to make payments on time each month, which can greatly affect the interest rates of the loans, as well!
Many factors have an impact on credit scores, including bankruptcies, foreclosures, late payments, unpaid debts, high debts, and others. Credit score requirements vary between lenders, so it’s critical for you to understand what they typically require.
When you have a low credit score, lenders are less likely to approve your loan since you are at greater risk of defaulting.
On the other hand, a higher credit score implies less of a risk to the lender, and a higher approval rate could result.
A lender will use your credit score to calculate the terms of the loan, such as the interest rate. It’s important to note also that there are ways you can improve your credit score.
Improving credit scores are vital as lenders have tighter credit score standards when it comes to real estate investments as they require large loans. If you default on a real estate investment loan, the lender must pursue foreclosure procedures in order to recover their funds. Most lenders will do everything in their power to prevent this, as the process can be time-consuming and costly.
If a bank or a non-bank lender is unable to provide you with a real estate loan due to your poor credit history or limited cash reserves, you might still explore the following options as alternatives for financing your real estate purchase.
1. Hard Money Loans
Hard money loans are frequently utilized by real estate investors who want to flip a home but do not have enough money or a good credit score. While credit scores aren’t usually a consideration when it comes to determining creditworthiness for these loans, borrowers must meet the loan’s underwriting criteria and have any cash reserves.
If you apply for a hard money loan, you’ll have to show that you can afford the rent payments. Because there is a greater chance of default for the lender, interest rates are generally higher than those on conventional loans.
Furthermore, the term of the loan is shorter, so you have less time to pay it back.
2. Private Money Loans
A personal loan is a loan from a family member, friend, or acquaintance. The repayment conditions must be agreed to by both parties in the agreement—otherwise, it may lead to future issues.
If you opt to borrow money from a friend, make sure that he/she understands all of the risks involved and that all of the terms are in writing. To minimize the chances of a misunderstanding, hire a lawyer to write up the agreement—this will both protect you legally and ensure that your relationship isn’t harmed as a result of an unclear understanding of the loan.
3. Invest with A Partner
Investing with a partner can assist you in overcoming credit score issues. They can qualify on your behalf if their credit score is excellent.
It has no bearing on your other partner’s chances of obtaining a loan to acquire joint ownership in the real estate investment if one of you has poor credit.
With that in mind, the following are two types of partnerships to consider:
A limited liability company (LLC) is a kind of business entity that exists as its own legal personality. LLCs receive the tax advantages of a partnership but are protected from personal responsibility since they are treated as a corporation. In some jurisdictions, an LLC can be set up by just one individual.
Lenders will still appraise personal credit, but they do not consider each member’s credit in the LLC. As a result, as long as one of your LLC’s members has excellent credit, you should be able to get a loan through it.
Only one person can create a limited partnership. A limited partnership is formed by a general partner and a limited partner, with the general partner held personally responsible.
A limited partnership might be beneficial in obtaining a loan if one partner has excellent credit and the other partner has terrible credit. The credit-worthy partner can become the general partner and thereby secure the loan. Keep in mind that if the partnership is dissolved, this partner will be held personally responsible for any financial debts and other commitments.
4. Seller Financing
If you can’t get a bank loan or credit union loan, seller financing is an option. You can save money on interest by using a seller finance option since the lender is no longer involved. You may secure financing directly through the seller instead of going through a bank or other middleman. But of course, finding a seller who is prepared to accept seller financing is presented as the first problem you have to overcome.
Firstly, the seller might be in danger of foreclosure if the buyer defaults. Secondly, even if they don’t, they’ll have to go through the whole process of putting their property back on the market. This procedure is not only time-consuming, but it’s also pricey. As a result, most sellers are unwilling to finance the buyer themselves.
With this in mind, the following are three different kinds of seller financing choices to consider:
Contract for Deed
A contract for deed is quite basic. When a buyer agrees to buy the home, they take immediate possession of it. They will, however, pay the seller in installments over a set length of time.
The seller will have the legal title until the mortgage is paid off. You don’t need excellent credit to take advantage of this seller financing option because you won’t be dealing with a lender; all you’ll need is enough cash to pay each installment when it arrives.
Another alternative to obtaining a good credit score when buying real estate is to use subject-to financing. The buyer may take over the seller’s existing mortgage with a subject-to contract. You’d be paying off the seller’s mortgage for them until it is entirely paid off. There are several benefits to signing such a contract.
As the buyer, you won’t have to worry about your credit score or pay any traditional closing costs. You must also agree on how to reimburse the difference between the value of the property and the remaining balance on your existing mortgage.
You may, for example, pay the difference in cash up front. You might even offer to pay the balance owing in an arranged installment plan after you’ve paid off the mortgage.
Seller Carry Notes
A seller carry note is a legal document in which the seller agrees to finance the buyer. You would essentially borrow money from the seller to acquire their property. The seller acts as the lender.
Most sellers will require a greater down payment (usually 25%) and charge a higher interest rate than traditional lenders would because they are taking on more risk.
5. Consider Wholesaling Investing
Finding many real estate investment possibilities is what wholesaling is all about. As a wholesaler, you’ll search for people who are eager to sell their property. You’ll come to an agreement and lock them into a contract once you’ve identified a motivated seller.
You can sell a contract that you have acquired to another investor for a profit after you obtain the agreement. Essentially, you become a middleman by assisting sellers in finding buyers and providing real estate investment possibilities to investors.
There are several advantages to wholesaling investments such as:
- You don’t need a large sum of money to start investing.
- You may discover several offers at once, allowing you to make a large return on your investment.
- There’s less risk since you’re not the one buying it.
The disadvantage is that you’ll almost certainly be required to put down an earnest deposit. Otherwise, the seller may have no reason to trust you to locate a buyer.
Bird-dogging is comparable to wholesale. Bird-dogging, like wholesaling, entails the search for real estate investment possibilities. The key distinction between the two is that with bird-dogging, you don’t have to pay the seller anything to get them under contract.
Instead, you charge a commission to investors who want to buy into your deals. This strategy won’t make you as much money, but because it doesn’t need any up-front cash, you won’t have to worry about getting financial assistance.
7. Lease Options
A lease option is a contract between a landlord and tenant in which the tenant has the right to buy the property at any time during their term after they have resided there for a specific length of time.
Lease agreements are advantageous for borrowers with bad credit because they do not have to purchase the property immediately. Essentially, you’ll rent the property until you’re ready to buy it, giving you time to improve your bad credit score.
Invest In Real Estate Despite the Bad Credit
Don’t let bad credit jeopardize your plans to invest in real estate. Just because you can’t get a regular real estate loan because of a poor credit score doesn’t imply that all hope is lost! You may always raise your credit score, and it’s worth striving for that over time.
Despite your bad credit, there are several alternatives for obtaining money for your investment property.
We know that real estate investors face unique and evolving challenges when it comes to obtaining financing for their real estate purchases. It’s becoming more difficult and essential than ever to have the cash ready to fund your transaction, and because we can’t achieve anything without our customers, we’re committed to assisting you.
With hundreds of successful transactions under our belt since 2008, we have the distinct ability to be your one-stop shop for hard money loans. We’d be delighted to assist you in closing your next transaction.
We can help you get the money you need to invest in real estate. Contact us today.