Dear Gina: How Can I Get a Bad Credit Mortgage or Find A Hard Money Lender So I Can Buy My Home?
By Gina PogolMortgage Credit Problems Columnist
Matt asks: Where can I find a private investor / hard money lender or a mortgage for bad credit? We currently pay $2,600/month on a nice home we've recently remodeled. We want to exercise a lease option to purchase but 3 lenders have denied us a mortgage; my wife and I cant seem to get ahead and a hold on our credit. I'd like to get a deal to secure our home: it's worth $400K, we have $15K to put down and the purchase price is $285K, so we would need a loan for $270K. This seems like a great deal.
Gina's answer: This situation presents a lot of pitfalls and possibilities.
First, get a property appraisal--real estate markets these days are hugely unpredictable and establishing that $400,000 value is critical. Assuming that the home has in fact appreciated to $400,000, from the traditional lender's point of view, a home is "worth" the LOWER of the purchase price or the appraised value. So they'd have to go with $285,000 as a value because that's the purchase price. And if you only have $15,000 to put down, that's a very risky loan (only 5% down and a borrower with admittedly poor credit). I can see why traditional lenders have been unwilling to do this.
However, a "hard money" or private lender may be perfectly willing to use $400,000 as the home value if in fact the property appraises for that amount--that gives you 32.5% of equity instead of just 5%.
I'm going to assume that the sellers have no interest in helping you--either by renegotiating a new lease or carrying the loan--because if the property is worth that much more than the selling price it's in their best interest to take it back and sell it themselves for $400,000.
How do you find hard money lenders? You can find them online or get referrals from regular mortgage lenders. Do your due diligence--these guys are private lenders, not regulated the way banks are. Some are called "loan-to-own" outfits because their ultimate goal is to stick you with a mortgage so onerous that they know they'll be able to foreclose and take your house.
Can you afford this? The $15,000 you've saved up can't be applied to your down payment because you need it for closing costs--hard money costs several points up front. And your rate will be an UGLY double digit figure. So plan on paying more than your $2,600 a month rent--at a 14% rate on $285,000, you're looking at $3,377 a month! And you have to pay taxes and insurance too. And your other bills. Your goal should be to improve your credit to the point where next year you can refinance to an FHA mortgage.
If there is no way you can buy this house and pay your other bills, wait. You might want to try credit counseling, clean up your credit, and give yourself some time to qualify for an FHA loan. If your lease option is nearly up and you have to move fast, try speaking to a bankruptcy lawyer about discharging debts before exercising your lease option with hard money. Pay on the loan for two years, clean up your credit (this is crucial!), and refinance to an FHA loan as soon as you can get approved. By then, you should be able to count all the equity that you acquired by purchasing a $400,000 home for $285,000.
You mentioned that you and your wife can't "get a hold" on your credit. You might want to look into obtaining credit and home ownership counseling. Good luck!
About the Author
Gina Pogol has over a decade of mortgage lending experience, in addition to practice as a paralegal for a bankruptcy attorney, and as a business credit consultant for Experian. She is also certified to underwrite Fannie Mae loans. She earned her BS in Financial Management from the University of Nevada.
All information provided “as is” for informational purposes only, and is not financial advice. MortgageCreditProblems.com, its affiliates, and any of the independent providers of information on this site shall have no liability for any informational errors or incompleteness, or for any actions taken in reliance on information contained herein.
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