Hard Money Loans For Bad Credit: Can You Get One?

Poor credit shouldn’t prevent you from making a smart investment. If you come across the perfect rental property or have experience flipping houses, you don’t need credit. You need capital. 

Unlike conventional lenders, who charge lower interest rates and are interested in slowly making a profit over time, hard money lenders are looking to make some fast cash—and in many cases, so are you. Hard money loans typically last 3 - 36 months, and at an average interest rate of 11% - 13%.

Here are a few occasions when you should get a hard money loan, even when you have less-than-stellar credit. 

Buying An Investment Property

Whether you’re looking to purchase a beach house to put on AirBnB or a commercial property to give your business a brick-and-mortar home, hard money loans can help. If you have a solid plan, but lack the credit score for a traditional loan (or can’t get one due to their strict requirements), getting a hard money loan can get you the financing you need to get you up and running. 

Also, if the loan amount you need exceeds traditional commercial loan limits, a hard money loan, a combination of hard money and working with private investors may be your only option.

Fixing And Flipping A Property

An experienced real estate investor doesn’t need good credit. They need the skills required to identify a fixer upper with potential, renovate it, and resell it for a huge profit. Since these investors are in it for the short haul anyway, they don’t need a long-term loan. Usually a hard money loan of 12 months or less will do. Also, a high interest rate isn’t too much of a concern, because they won’t lose too much of your profits due to interest, anyway. 

For example, if you take out a hard money loan of $100,000 at 12% interest and resell it for $200,000 six months later, here’s how you’d fair:

$200,000 - $100,000 (loan amount) - $6,000 (interest) = $94,000

This example doesn’t account for renovations or seller’s costs, but even if they amounted to $24,000, you’re still making a $70,000 profit for 6 months worth of work.

When Your Credit Is Going To Improve

Nothing stains your credit score forever. If you filed for Chapter 7 bankruptcy, it will fall off your credit report ten years from the date you filed for bankruptcy—sometimes even sooner. If you filed for Chapter 13 bankruptcy or were sent to collections, those drop off your credit report after seven years. While the score increase varies greatly, many people report their credit score increased between 30 and 100 points after a bankruptcy was removed from their credit report. 

Let’s say your credit score is 590, partially because you filed for Chapter 13 a little more than six years ago. You’ve got less than a year before your credit score improves, but you found the perfect home, you have strong cash reserves, and a great price during a buyer’s market. It probably won’t be on the market a year from now. 

If you’re looking to buy a house, the minimum credit score for a conventional loan is 620. Even if your credit score only increased by 30 points, you’ll be at the minimum in less than a year, and money isn’t a huge concern for you right now.

In this scenario, your options are to either wait another year and hope you’ll find another home to your liking, or to get a residential hard money loan and then refinance when your credit improves. Your interest rates will be high until you can refinance, but if you really want to buy a home, it’ll probably be worth it in the end. 

Let’s assume you’re going to take out a 12 month hard money loan (in this scenario, you’re guaranteed to refinance and switch to a conventional mortgage at the end of 12 months) of $200,000 at 12% for 12 months.

While you have a hard money loan, you’ll end up paying $2,000/mo in interest, or $24,000 for the year. It’s a lot of money, but when you refinance with a bank or credit union, you can secure a conventional loan at 4% interest. Even if you refinance back up to $200,000, you’ll only pay $666.67 a month, or $8,000 for the year. You’re losing a lot of money due to interest in your first year, but once you secure a conventional loan, you’ll enjoy the home you wanted at a more typical homeowner’s rate. 

Short answer: If you don’t fit into one of the three categories above, you probably shouldn’t take out a hard money loan. Instead, you should focus on improving your credit, which I’ll talk about a little later. 

Even if you fit into one of the above categories, you shouldn’t get a hard money loan if you don’t know if you can pay it back or if the risks make you uneasy. If you default on this loan, your hard money lender can legally assume your loan collateral to recoup their losses. Then, not only do you have poor credit, but you’ve also lost an asset(s).

Mostly, hard money loans require tangible value in the form of assets. To make a quick return on their investment, a hard money lender wants to know that the value of the real estate investment can cover the loan. In other words, they’re interested in the loan-to-value (LTV) ratio. 

Here’s how LTV works: 

Let’s assume you need hard money lending in the amount of $100,000 for a fixer upper, but know that you can sell it for $200,000, the property’s after-repair value (APR). To determine LTV, you simply need to divide the loan amount by the after-repair value (ARV). In this case, your LTV ratio is $100,000/$200,000, or 50%. 

While the percentage differs depending on who you work with, most hard money lenders prefer an LTV ratio of 70% or less. If something goes wrong with your fixer upper and you end up defaulting on your loan, they need to know that they can make good on their investment. An LTV ratio of 70% or less also discourages borrowers from walking away if things get tough. 

Other factors related to LTV ratios that may appear on a hard money loan application include:

All this information will help your lender decide whether to approve your loan. 

Some hard money lender will look at a borrower’s credit score. Even if they do, a credit check doesn’t carry the same weight for hard money lenders as traditional lenders. Also, since many hard money lenders are mostly interested in your LTV ratio, the hard money approval process goes quickly—sometimes taking just a few days!

Most people don’t turn to hard money loans right away. Originally, hard money loans were considered a “loan of last resort.” Since then, real estate investors have discovered these loans’ amazing benefits.

If you’re looking to buy a home to live, traditional financing is usually the way to go. Here are the minimum credit scores required for each loan type if you want to work with a traditional lender:

*The minimum credit score for an FHA loan is 580 if you only put 3.5% down. If you have at least 10% of your down payment, your minimum credit score drops to 500.

Credit scores range from 300-850. To qualify for the best mortgage rates with traditional lenders, you should have “exceptional” or “very good” credit. Here are the score ranges and what they constitute:

If your credit is bad, but you’re interested in getting a conventional loan, or starting with a hard money lender and then switching to a traditional one, here are a few things you should know about how credit works.

Your Credit Score Is Determined By 5 Elements

Here are your credit score’s five determining factors, according to Experian:

Lower Your Credit Utilization Rate

Experian recommends keeping your credit utilization rate under 30%. In other words, if you have $10,000 in credit card limits, keep the total amount of credit owed under $3,000.

Pay Your Credit Cards Every Month

Ideally, you should pay your credit cards in full every month. However, that’s not always possible. If it isn’t, pay as much as possible. If you think hard money loans have high interest rates, you probably haven’t been paying close enough attention to your credit card statements!

Try to avoid minimum payments, as tempting as that may be.

Don’t Apply For More Credit

Applying for a credit card or loan can adversely impact your credit score. If your goal is to improve your credit, getting more of it isn’t the answer.