Private Bad Credit Lenders

Private bad credit lenders are often a viable source for borrowers whose credit history does not meet the standards of other mortgage lenders.

Hard Money Lenders

Borrowers with specialized loan needs or too many credit problems often are oftentimes unable to receive mortgage loans from traditional mortgage lenders. A traditional lender may assess that the risk is too high and may even refuse to fund a high rate mortgage. On the other hand, a private lender may be willing to make the loan.

Some of the most common users for private lenders are borrowers in circumstances such as the following:

• Facing foreclosure with a 120-day or 180-day delinquency, who are looking for a new loan to pay off their current mortgage
• Trying to purchase property on which an accurate appraisal is not available
• Self-employed individuals who can’t verify their income
• Homeowners who want to refinance a mortgage and receive an extremely large cash payment
• Purchasing properties in areas which are large distances from the lender or properties in remote areas
• Trying to build a home using non-traditional construction materials and designs
• Trying to finance properties that receive a significant proportion of their value from the land, not from the home on the property
• Real estate investors who want to purchase properties and quickly sell them for profit, but who are unwilling to follow the restrictions often imposed by banks for these “flip” loans.

Lenders who make these higher risk loans are usually called “hard money lenders” or “private money brokers.”

Purpose of Private Bad Credit Lenders

Borrowers who have bad credit may need to turn to hard money lenders specializing in higher risk loans. These private bad credit lenders are frequently individuals and small, local companies who will make a loan to the borrower as an investment. Typically these bad credit lenders:

• Are private investors who analyze the risk and may be willing to make the loan with a very high interest rate.
• Only offer loans within a specific geography. They usually want to be able to easily view the property and understand the specifics of the neighborhood.
• Are sometimes hard to find and may not advertise. Instead, private mortgage loans are often arranged through mortgage brokers

Loans to Solve Problems

Loans made by private lenders or brokers are most often used as temporary loans to solve a borrower’s immediate problem. Once the loan proceeds are received, the borrower may then make other loan arrangements. For example, if a property is worth $200,000 and a private lender provides the $135,000 necessary to pay off the current lender who is foreclosing, the homeowner has several options after they receive the loan proceeds from the private lender including:

• Keep the loan with the private lender and try to negotiate a better rate
• Wait until the homeowner’s credit has improved and the refinance the property with another lender
• Sell the property

Loan Terms and Cost

Loans from bad credit lenders usually have very restrictive terms. These terms are designed to help the lender minimize their risk. For example:

• Loans are often balloon loans, requiring full payment of the loan after one or two years. This short-term loan practice gives the lender the opportunity to quickly get their money back so that they can reinvest their money by loaning it to another borrower.
• Loans must be first mortgages, not second or third mortgages.
• Lenders usually require the homeowner to have a sizeable equity in the home, with required down payments of 30 to 50 percent. This large equity position makes it easier for lenders to make a profit by selling the property if it goes into foreclosure.

Private lender loans are usually significantly more expensive than bank or mortgage company loans:

• Interest rates are often double digit, reaching as high as 12 to 18 percent.
• Fees can include up-front points ranging from about four to eight percent of the loan total.

How to Find

The easiest way to find private bad credit lenders is to ask a mortgage broker. The broker will often have direct contact with hard money lenders or they will know who to call to get in touch with individuals or private money brokers who might be interested in making a private loan.

You may also see ads in local newspapers for private money lenders. Use caution. Check your local Better business bureau to make sure that there are no complaints on file against the lender.

Read the Terms

As with any loan, be sure you read and understand everything you sign. Current and future interest rates and fees should be thoroughly reviewed. As with all loan documents, don’t sign something with terms you don’t understand or interest rates and fees you can’t afford.
[tag]bad-credit,loan,mortgage[/tag]