With new mortgage rules passed since the last recession, it has made it even harder to qualify for home loans for bad credit borrowers.
Private money loans are a good option for home loans for bad credit borrowers. A private money lender is simply defined as a non-bank lender.
If the term private money makes you nervous, think for a minute that the largest private money lender in the United States is ‘Quicken Loans,’ as of the date of this posting. But for bad credit borrowers, ‘Quicken Loans’ is not a good option as you must good credit and they have stringent guidelines.
A few reasons for bad credit could include, bankruptcy, unexpected medical bills, credit disputes, temporary job los, or even a difficult divorce.
Private money lenders provide alternative solutions for bad credit borrowers by offering sub prime loans, bridge loans, or portfolio loans, or a hard money loan.
Private money lenders that do make home loans for bad credit borrowers usually fall in one of the two categories:
1. Sub prime loans
2. Bridge loans.
Interest Rates
While these loans have slightly higher interest rates than FHA or conventional loans, they tend to be faster and come with less stringent requirements for loan approval. Because each borrower has different goals, it’s important to determine those goals before pursuing one loan over another.
For borrowers with the goal of having a long-term loan option, sub prime loans are a good alternative because these loans can be held for a term of up to 30 years, with both principal and interest payments.
In fact, the most common use of a sub prime loan is for home loans for bad credit borrowers who want to keep the loan for a long term, 5 years or more.
There are sub prime lenders that will lend to borrowers with credit scores as low as 500, even those who are only one week out of bankruptcy or foreclosure. The interest rates on these loans range from 6% to 9%.
Short Term Bridge Loans
For borrowers with the goal of purchasing a property quickly and refinancing or reselling in the short-term, in under 5 years, bridge loans are the best option because they are typically 2 years or less.
- To purchase a property and then sell or refinance with an FHA loan or conventional loan within 1-2 years.
- Pay off revolving debt on credit report with the goal of raising the credit score of the borrower. Bridge loans are typically not credit based either, which means lenders don’t decline a borrower because of a low credit score. Because bridge loans are so short-term, they don’t appeal to borrowers who are looking for a long-term loan option. The interest rates on bridge loans are higher than sub prime loans, and range from 7% to 12%.
A borrower looking to purchase a property, or refinance a property, is quickly discovering that there aren’t a lot of options for home loans for bad credit borrowers.
Since the last recession, bank lending standards have grown more stringent and it is not easy to qualify for a mortgage loan.
Banks often look for reasons not to make loans, rather than focus on reasons why they should make loans.
Some people have bad credit, and well, bad things happen. So what are the alternatives to an FHA loan or a conventional loan?
When searching for home loans for bad credit, many people simply don’t know where to start. Hopefully this short article has helped explain how private money lenders are a good resource for bad credit borrowers.
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