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Hello everybody I am new to real-estate with 100K cash I want to create passive income but i have bad credit and want to maximize my money, what could be the best approach to getting loans to increase my buying power?

Josh Young · Answer

@Kyle KeaneIf you have bad credit you can buy a rental property using a DSCR loan that is asset based rather than credit based. Or you could buy a distressed property using hard money (also an asset based loan) and rehab the property, then either cash out refi or sell for a profit. Another option would be a primary residence FHA loan if your credit isn’t too bad, anytime you can get a primary residence loan it’s a huge advantage even if you have the extra cash it’s almost always better to hold extra cash.  Either way you should talk to a mortgage broker, they will be able to give more specific advice. Good luck!

Ryan Stuckey · Answer

"You can get a DSCR loan with bad credit"

Not really. Most lenders have a DSCR minimum credit score of 660 and at that level the interest rate is higher and makes the property even more difficult to meet DSCR/cash flow minimums at this time. So 700 is typically the target to get a solid rate.

DSCR underwriting is MAINLY based on the property, but not ENTIRELY. The personal credit of the borrower is still an important factor.

While one may qualify at 660, I'd recommend to anyone getting credit to 700 before considering a DSCR rental loan, in order to get your rates down and profits up.

Nathan Gesner · Answer

You can make significant improvements to your credit in less than 12 months. I would talk to a lender or credit repair specialist for tips and get cracking on that immediately.

Listen to the BP podcast, particularly the "Seeing Green with David Greene" episodes. David asks questions and speaks the hard truth about "passive" and "cashflow" and other newbie questions.

Vanessa Ivonne Hernandez · Answer

1. Work on paying off debt.

2. For debt that cannot be immediately paid off, contact that debt with the goal of lowering the minimum monthly payment that's being report to your credit bureau.

3. If you cannot wait to repair your finances then you can get a partner/co-borrower for your loan. They would need to be in a better financial position to offset where you're at.

4. Consider alternate financing options - hard money, dscr loans, etc. Just remember that whoever you go with, it's all going to come down to your ability to repay. Hard money or loan products are still going to asses your financial credibility so be ready for higher rates and tighter terms if you try to buy now.

Good luck on your journey!

Mike Klarman · Answer

You can't get a DSCR loan with bad credit.  There's 360 payments in that loan, credit is really important factor.

When you say bad, what is it?

Jarrod Covey · Answer

Hi @Kyle Keane,

Welcome to the world of real estate investing! It's great to see that you have cash on hand to invest in creating passive income. While having bad credit can make it difficult to obtain loans, there are still options available to you.

One potential approach could be to consider private lenders or hard money lenders who may be willing to overlook your credit history in exchange for a higher interest rate. You could also look into seller financing, where the seller of a property acts as the lender for the sale.

Another option could be to partner with someone who has good credit and is willing to co-sign on a loan with you. This can help increase your buying power and potentially secure better loan terms.

Overall, I recommend consulting with a financial advisor or real estate professional to determine the best approach for your specific situation. Best of luck with your real estate investments!

Wale Lawal · Answer

@Kyle Keane

If your credit is so low that you can't qualify for a conventional mortgage to buy an investment property, you may need to turn to alternative types of loans or arrangements. You could:Ask About Seller FinancingIf the current owner of a property owns it outright, they might be willing to finance the sale themselves. While your credit won't necessarily be as important of a factor, you may have to agree to a higher interest rate or make a large down payment to secure the deal. You may also have to agree to the seller's demands, and if you don't follow through with your payments, they may be able to take back the property.Find an Investment PartnerRather than trying to finance the entire deal on your own, you could work with one (or several) partners and purchase an investment property together. However, you'll need to bring something to the table, such as capital to invest or the ability to help repair and maintain the property.Apply for a Hard Money LoanRather than turning to traditional mortgage lenders, you may be able to borrow money with a hard money loan. These are secured loans with rates and terms that depend on the investment potential of the property rather than the borrower's creditworthiness. However, hard money loans often have high interest rates and short payment terms, and they're generally best for real estate investors who plan on buying and flipping a home rather than purchasing a rental property.Ask for a Private Money LoanA private money loan is a loan from friends, family members or other acquaintances who lend you money directly. These could be somewhat informal loans, although you'll likely still want to have an attorney help you create or review a loan document. While the loan could be easy to get from a credit perspective, make sure everyone's expectations are in line and consider how it could affect your relationships if you aren't able to repay the money.Consider a Government-Backed LoanGovernment-backed mortgage loans, such as FHA and VA loans, may have lower credit and down payment requirements than conventional loans. While you may need to use the loan to purchase your primary residence, you can buy a multiunit building, live in one unit and rent out the others. There are multifamily FHA loans, but even the standard FHA and VA loans let you buy a property that has up to four units.

All the best!

Robin Simon · Answer

Agree with this - people still mix up DSCR Loans with Hard Money loans too much.  DSCR loans are a near-conventional product that may allow poor credit down to say 620, but your rates and terms will be very harsh.  True hard money is really asset based and doesn't typically take credit into account, but you will pay through the roof in terms of points and rate

Jenni Utz · Answer

Seller Financing

Also called owner financing, is a great way to finance real estate deals. If it is difficult to get financing because of credit score, predictable salary, and imperfect employment history. This is great to leapfrog you into a deal you otherwise could not afford. All that’s needed is to execute a promissory note. The interest rate, repayment schedule and default conditions should be set by the seller, to which you agree as a buyer. Seller financing deals are usually more popular in areas or periods of time where it’s harder to get loans. I would recommend having an attorney review the promissory note.

The pros of this type of financing is that you don’t have to worry about the rejection of the banks. The seller is usually motivated to sell. It breeds trust in the quality of the deal being made if the seller is willing to finance it. Sellers get to collect interest payments, which built some of the richest institutions in America – banks…and the mafia! Sellers also don’t get hit with outrageous capital gains all at once.

Some cons of this type of arrangement is you may pay a little higher interest rate than you would with a traditional bank loan.  They usually come with a balloon payment in 5 years or so. For sellers, they don’t want to play the ‘banking’ role. They want to get their money to invest into their new deal. This means that it may be harder to come across seller financing deals. Other ways to buy that count as seller financing include lease-options, equity sharing and lease-purchase agreements.

Private Lenders

Another great way to fund your real estate deals is private lenders. This is not to be confused with hard money lending companies. These can be people you know or know through a friend of a friend, that have been blessed with an abundance of modern civilization’s most precious resources…money! People who received an inheritance, just sold their company, or won the lotto could be swimming in dough and not have great ideas for what to do with it. You could approach these people with an equity share or interest payment proposition, which may be the investment opportunity they’ve been searching for. You could offer 8%, 10%, or 12% interest on their money, which may be the best rate they could hope to make. The pros of this kind of deal is that these deals tend to look more at your track record of success and the actual deal, instead of looking at things such as employment history, credit score, liquidity and other factors that banks tend to focus on. This is also a great way to do business because you may get good at this form of real estate deal financing and find unlimited opportunities to get private money. If you know you make winning presentations and sell yourself you may love hitting the streets and dazzling crowds with your ideas. The cons of private lenders include the fact that they usually depend on you having a good track record of success. This is no good for you if you are just starting off as a real estate investor. Most people with a lot of liquid cash are pretty smart folks and know how to watch their money, and the last thing they want to do is put their money in the hands of an un-trusted partner. The other thing about private lenders is that they can be hard to find. If you have a broad network of friends and family and friends of friends who are a more affluent crowd then you will love the private lending strategy of financing your real estate deals. However, if you don’t have a network then it could be difficult to gain traction with this form financing. (Another reason going to Investor Real Estate Meet Up groups is important. You will gind some hard money lenders in these groups.) Lastly, if you’re not good at selling yourself you may find it difficult to succeed with private lender financing, because often times private lenders are buying you as much as the property you’re investing in with.

Hard Money Lenders

Asset/property-based loans are another very common way to invest in real estate deals is hard money loans. Admittedly, hard money has a very sinister sound to it. Images of meeting in dark alley ways with guys named ‘Tony batters and Pitbull Paul’ come to mind. You may think striking a deal with these guys is a one-way ticket to swimming with cement shoes and alligator infested swamps. Indeed, predatory lenders have given hard money lending a bad rap but it’s actually a legitimate way of funding real estate deals, and very common. Hard money loans are short term loans that are secured by the hard asset – real estate. Funds made up of private investors usually provide the money for hard money lenders to lend to you. The length of time hard money loans usually go for is 12 months. Longer term hard money loans may extend 2 to 5 years. The pros of hard money lending is that most often when the bank says “No” to your deal, a hard money lender can still say “Yes” to your deal. Hard money lenders usually have a niche they specialize in. Some residential and some commercial, some multi-unit and some double wide trailer parks. This means you need to find a hard money lender that specializes in the type of property you are investing in. It’s also good to have hard money lenders who specialize in the type of property you’re investing in because if the deal raises red flags for them perhaps it should for you as well. Plus, there are plenty of hard money lending institutions that can easily be found, so you should not have a problem getting in contact with one. Some of the cons of hard money lending is that you will usually pay much higher interest rates for the loan. This means it is expensive money to secure. Another issue is that since these are usually short-term loans, you could run into trouble if you’re not able to refinance or sell for your term is up. Hard money loans are not appropriate for all types of deals. For instance, they are not appropriate for buying your primary residence. If you have good credit, income history and no history of foreclosure, bank financing is your best bet.

Hard money loans are great for:

• fix and flip deals
• construction loans
• buyers with credit issues
• quick money

Colin Higgins · Answer

I too would say get your credit straight before investing elsewhere. Put those fires out before you plant seeds. No shame in taking a second to regroup.

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