Larry Lapidus

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Hard Money Isn’t Always for the Credit Impaired

Hard money, or private money in some circles, are loans issued that fall outside the norms of conventional or traditional financing. With traditional loans, they’re underwritten to predetermined standards with guidelines involving loan amounts, credit scores and income sources to name a few. When approving a loan in this manner the loan is then eligible for sale in the secondary market. This frees up more funds for the lender to continue making more loans. Fannie Mae and Freddie Mac are the most common but so too are FHA, VA and USDA loan programs.

But sometimes there is a situation where the applicant for some reason can’t qualify for a traditional mortgage. Many times its because the applicant has damaged credit. For example, someone may have recently declared bankruptcy and credit scores fell through the floor. Depending upon the loan program, the applicant must wait two or more years and reestablish credit before applying again. Or, someone may be going through a messy divorce and joint account payments are being missed during negotiations. Hard money lenders can look beyond a credit score.

Hard money places a lot of emphasis on the property and less so on credit. For example, a real estate investor sees a duplex that really needs some work. So much work that a bank won’t place a traditional mortgage. If the repairs were made, then the bank would be more than happy to approve a new mortgage but not in its current condition. A hard money lender would look past the needed repairs and look more toward what the property would be worth once the duplex was repaired and remodeled. Someone with credit scores in the mid-700s couldn’t obtain a mortgage due to the condition of the home. That’s why hard money isn’t always for the credit impaired, instead it’s due to the condition of the property.

Let’s say a real estate investor takes a closer look at that duplex. The property in its current condition is listed at $100,000. Needed repairs include a new roof and plumbing issues amounting to another $20,000. The investor contacts a licensed appraiser and pays for a new appraisal but instead of appraising the property “as is” the appraiser takes into consideration what the duplex would be worth “as repaired.” The investor also hires an inspector to look for any other defects beyond the obvious. The appraiser reports back that if the duplex were brought back into shape it would easily sell for $200,000. If kept as a rental, a rent survey for the duplex will also be performed. The appraisal then reports the duplex could bring in $1,500 per unit, or $3,000 for the entire duplex.

If the investor bought the property with the intentions of “fix and flip” then the repaired home would then be eligible for traditional financing, further widening the potential of buyers. Hard money can be an excellent option for those who have damaged credit but by no means is hard money limited to those with impaired credit.

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