So many people with credit events feel trapped and have that nagging FOMO feeling. When there are solutions, and you need not miss out!
I have personally helped many people with sub 620 credit scores be investors.
Depending on the type of credit blemish and your credit score, there are different avenues to get financed.
The most obvious is hard money or private investors. This is when you go to an investor you know who wants to receive interest and understands how to calculate their margin of safety in the property (their loan to value) both in the present condition of the property and the future value. These lenders will want the most significant downpayment, around 30% – 40%. The bonus though, is that they will finance 70% of the future value or ARV (after repaired value), so if you are getting a great deal, you may have very little of your own money into the deal.
Example: I recently did a deal where the purchase price was $30,000, repairs were $35,000, and the after repair value was $120,000. My loan was $80,000, so I had no money into the deal. After the repairs are done, you can get a conventional loan to pay off the hard money loan, which is usually a “short fuse” loan of 12 months.
There are hard money mortgage bankers that represent these types of investors that do the vetting for an investor. They package the loan and match you to a private investor.
The people above are probably your most expensive source of money between 8-15% depending on the market.
The next source of money is the FANNIE MAE rehab loan or FHA rehab loan. This would be your lowest interest rate highest loan to value (lowest down payment) loan. You must qualify for these and have at least a 620 score for Fannie Mae’s program and 580 (though there are exceptions to go lower) on the FHA rehab loan called 203(k). This is the lowest interest rate program though FHA will charge mortgage insurance. There are longer waiting periods with these sources on major credit vents like BK and foreclosure. If you have had a recent BK or foreclosure, then look to my next source.
In between these two extremes is the non-QM loans (lenders that do not have to follow Fannie Mae/Freddie Mac or FHA qualifying guidelines). They will finance low credit scores, past credit problems like BK and foreclosure after just one day waiting period. They will qualify you only on income proven through the cashflow/ deposits in your bank statements or the cash flow of the building, or just your 1099 (no tax returns or pay stubs required), etc. They need more down payment than Fannie/Freddie but less than hard money but only allow light rehab. They have lower rates than hard money but higher than Fannie/Freddie and FHA. The more recent the credit events or lower the credit score will get you the higher rates, but at least you get financed.
Last, of course, you can form a partnership with someone with good credit and pay them for their participation. Make sure you have a formal agreement in place that outlines ownership rights, interest payment, whether this person is a debt or equity partner, length of partnership responsibilities, and how each partner can get out, etc.
I have a great interview with an attorney who advises internationally on partnerships.
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