Investing in real estate can be a smart decision, especially if you’re also considering investing in stocks or bonds. Real estate investments give you more control, have lower risks, provide additional tax benefits, and offer protection against inflation when compared to stocks and bonds. But what happens if you have bad credit? According to Experian, 16% of Americans have very poor credit, which is defined as a credit score between 300 and 579. Luckily, there are a few ways you can secure funding for investment properties despite having bad credit.
Private Money Lender
There are two types of lenders when it comes to real estate. Traditional lenders are the standard banks and institutions that offer mortgages, small business loans, and home equity loans. The rates for these loans are based on your credit score and credit. Private money lenders are people who provide direct funding to those seeking money. They offer asset-based loans typically based on the investment property’s price after repair value.
If these private lenders believe that they can get a return on their investment, they might overlook a poor credit history. Private lenders are oftentimes friends or family members, but you can also find them through private lender networks. These individual lenders might have different stipulations and requirements, but they typically offer a simpler and faster decision than you might get from seeking a loan at a bank.
Also called owner financing, seller financing is an option if you can agree with the seller on an installment payment plan. The exact terms of the plan might vary, depending upon what the seller wants. Some sellers might want monthly payments, whereas others might ask for quarterly payments. These terms are specified in the promissory note, which provides legal proof of the agreement.
Seller financing gives you more flexibility than a traditional bank loan, as long as you find a seller who is willing to overlook your credit score. You might have to provide a specific down payment amount as well as proof of income before the seller agrees to the payment plan. Also, since you’re not using a bank, you avoid paying closing costs and typically can complete the entire process faster.
Look for homes that are for sale by owner and state in their listings that the seller is open to seller financing. Even if it’s not specified in the listing, you can ask about the financing terms. You might find that sellers are willing to work with you to make the deal happen.
Hard Money Loans
Obtaining a hard money loan is a quality option when you’re looking to invest in real estate. Despite its name, a hard money loan isn’t difficult to attain. Hard money lenders are private groups or individuals that offer short-term loans backed by real estate. These lenders only want the investment deal; they aren’t providing funds for anyone to purchase a residence to live in.
Hard money lenders also don’t consider credit scores to be the deciding factor in considering a loan. So even if your credit score is less than stellar, you can still apply. One of the main factors that hard money lenders take into account is the value of the home. The lender will use the property as collateral, so if you fail to make payments, they will take ownership of the property.
Home Equity Line of Credit
Similar to a hard money loan, a home equity line of credit (HELOC) is tied to the property and not your credit history. The main difference is that instead of the money being tied to the property you’re purchasing, the HELOC is tied to your current primary residence. You also use a HELOC to finance a long-term real estate investment.
The type of funding you can secure with a HELOC depends upon how much equity you have in your home as well as the loan-to-value ratio (LTV). You can determine the amount of equity by taking your home’s current market value and subtracting what you owe in mortgage debt. The LTV is the percentage of equity available to fund your investment. For a HELOC to work, the amount you receive for renting the property needs to be greater than your monthly expenses, which can include the following:
- Loan interest.
- Mortgage principal and interest.
- Property maintenance.
- Property taxes.
Option to Buy
Also referred to as a lease option, the option-to-buy method lets you acquire properties without legally taking ownership. You sign a legal option-to-buy document from the homeowner stating a specific price in the future and make regular monthly payments during the agreed-upon term. As a result, you can rent out the property on a long-term basis with the understanding that there’s a plan to purchase the property later for that stated price.
This option allows you to establish a steady payment history, accrue enough money for a down payment, and build up equity in the investment property. All of these factors can make it easier for you to qualify for a regular mortgage when the contract ends.
Real Estate Wholesaling
Real estate wholesalers act as the middle person between the seller and buyer. They identify properties for sale below the market value and acquire a contract from the seller. From there, they transfer the contract to a buyer or another investor. The way wholesalers earn their money is by attaching a wholesaling fee to the transaction.
Since you’re not truly holding onto the property, there’s no exchanging of cash. You don’t need to worry about a down payment and monthly mortgage payments, which means there’s no reason to run a credit check. However, finding a list of reliable buyers involves plenty of research and work. Also, wholesaling does not give you a steady source of income as it’s simply short-term profit.
If you’re looking for a way to invest in real estate but have poor credit, Titan Funding can help you acquire the funds you need. As a private money lender in South Florida, we have decades of collective experience along with the know-how to assist you in your endeavors. Contact our team of banking professionals to get started today.