Your credit is negatively impacted by filing for bankruptcy. However, bankruptcy is not the financial death warrant that many people believe it to be. If you know where to search and what to do, it is still possible to obtain a loan.
You may eventually come across the idea of hard money if you explore online for loan alternatives. Money loans are direct loans given by an investor to a person or company with the intent of purchasing and developing real estate. Hard money loan conditions are typically quite particular to the investor making the offer.
This article is for you if you’re an investor considering taking a hard money loan after bankruptcy. Join us as this article discusses the possibility of a hard money loan after bankruptcy and other valuable information.
Is a Hard Money Loan Possible After Bankruptcy?
Yes, in theory. The hard money lender’s appetite for risk is one of several variables that will determine whether or not they are ready to take a chance on a borrower with bankruptcy on their record. Borrowers can use hard money lenders to seek a loan after bankruptcy as an alternative to traditional banks.
Because they are simpler to obtain, hard money loans are frequently the best choice in the years following a bankruptcy. Instead of considering factors like credit scores, income-to-debt ratios, and the like, hard money lenders base their decisions on the strength of the given collateral. However, even if they emphasize other indicators, you should still expect this type of lender to check your credit. In addition, you can speak with a hard money lender to see if you qualify for financing after bankruptcy.
Additionally, hard-money lenders hasten the approval process. Unlike banks, which may take weeks to decide whether or not to approve a loan, hard money lenders can make a judgment quickly. Speed might make the difference for someone who has filed for bankruptcy.
However, in most circumstances, you’ll have to wait until your bankruptcy is discharged before hard money lenders will be interested in working with you. If you filed Chapter 7 rather than Chapter 13, this would occur more quickly. Nevertheless, in certain circumstances, you can persuade your Chapter 13 trustee and a hard money lender to cooperate. Also, investors must get acquainted with the hard money loan requirements.
Finding hard money lenders is one of the most challenging aspects of obtaining hard money. Since you are working with real estate, you will typically need to collaborate with investors interested in building property nearby. You can locate hard money lenders in your area with the assistance of your local real estate association.
Limitations of Using Hard Money Loans
1. Hard money loans have higher interest rates than bank loans
Hard money loans will always have higher interest rates than traditional bank loans. Due to the lender’s heightened risk and the borrower’s convenience in having quick access to funds, the interest rate is higher. Due to many variables, hard money loan interest rates often range from 9 to 15%. In addition, hard money lenders charge a portion of the loan amount as a loan origination fee, known as “points.” Most lenders charge between two and four points, although some will charge significantly more under certain circumstances.
While there are few hard money lenders in some parts of the country, there are plenty in others. Prices decrease due to competition, like with anything else. Hard money lenders are typically much more willing to lend in major cities than in more isolated rural locations. Before choosing a hard money lender, borrowers can benefit substantially from comparing rates at a few different lenders.
Although not all hard money lenders provide second mortgages or trust deeds on real estate, those who do charge a higher interest rate for second mortgages than for first mortgages. Typically, the interest rate difference between first and second mortgages is 3% to 4%. Due to the greater risk of the lender being in second place as opposed to first, the interest rate has increased. If the borrower defaults, the first lien holder has the right to foreclose on the property and eliminate the second lien holder’s stake in it.
2. It Requires A Down Payment Or Equity Of 20–30%
Some borrowers see equity requirements or down payments as a drawback that keeps them from getting a loan. Hard-money lenders can overlook several problems and shortfalls. But this only happens because they need a certain amount of equity in the property to serve as collateral for the loan. While banks emphasize income, a spotless credit history, etc., “hard money” leverages the “hard” asset to secure the loan. No down payment means no loan when using hard money.
Hard-money lenders take on all the risks if there is no substantial down payment or equity. For example, a 10% decline in the property’s value would result in a 5% loss for the borrower if they only put down a 5% down payment and got a loan for the remaining 95%. The borrower would need more motivation to complete the project and may quit it, default on the hard money loan, and leave it to the lender to clean up the mess if they believed the drop would continue or the property value would not increase shortly. For the hard money lender, this is the worst-case situation.
Conclusion
Even if you’ve filed for bankruptcy, you can return to borrowing practically right after it ends. One of your possibilities is hard money. Unfortunately, it is costly, quick, and only has specific uses. Hard money, though, can be a route to solvency after bankruptcy. It comes in handy if you’re in a position where you have a solid investment opportunity and a well-developed exit strategy.
You should make significant adjustments to your spending and manage your debt and future plans while going through bankruptcy recovery. However, before preparing to handle that responsibility, balancing your loan obligations with your post-bankruptcy recovery may be challenging.
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