The financial crisis of the previous decade left millions of Americans in debt, and as a result, many saw their credit scores decrease dramatically.  Due to the fact that the crisis was heavily influenced by what were then-known as “sub-prime mortgages,” it should come as no surprise that financial institutions have significantly raised their credit qualification requirements.  However, for those individuals who suffer from bad credit but want to purchase a property, all hope is not lost. There are actually multiple ways to get it done!

Perhaps the easiest way to purchase real estate with a low credit score is through a partnership.  Let’s assume that Bryan has been studying real estate investing for quite a while.  He decides that it is now time to purchase his first investment property.  He has found what he believes is the perfect deal, has devised a solid market strategy, saved enough money to cover the estimated down payment and the closing costs, but there’s a problem.  Bryan ran into financial issues when he maxed out his credit cards a few years ago, and his credit score suffered as a result.  He cannot possibly qualify for a traditional mortgage.  Bryan’s only hope is his friend Jonathan.  Jonathan has always displayed financial discipline, and therefore has a nearly perfect credit score.  He has previously mentioned a slight interest in real estate investing, but lacks the knowledge to put a deal together.  Bryan contacts Jonathan and expresses his interest in forming a partnership.  He presents the details of the property he wants to purchase, along with the research he has conducted, and elaborates as to why it is a great deal.  Jonathan agrees, and they form a partnership.  Jonathan’s high credit score secures them a mortgage at the desired interest rate, and they purchase the property.  When the property is rented, or flipped after renovations, depending on Bryan’s strategy, they will simply split the profits.

Another possible route for investing in real estate with a low credit score is seller financing.  The property Bryan has chosen is listed as “for sale by owner”.  Instead of applying for a mortgage through a traditional financial institution, Bryan meets with the owner of the property and presents the idea of seller financing – essentially, the property owner becomes the lender, and agrees to receive monthly mortgage payments rather than a one-time lump-sum payment.  Bryan knows he has to make the idea sound appealing to the seller, and therefore makes an offer which exceeds the current market value of the property.  The seller agrees, and Bryan takes ownership of the property.  The previous owner received a much higher sum for the property than he had previously anticipated, and Bryan overcame the limitations presented by his lower-than-average credit score.  It’s a win-win situation.

The third and final option for purchasing real estate with bad credit is what’s known as “hard money”.  I recently had a hard money lender on my podcast called Real Estate Deal Talk on iTunes. And the lender explained, “we do not follow strict credit qualification requirements because the loans provided are collateralized against the market value of the property for which they are issued.”At this point, Bryan searches his local newspaper’s advertisement section and finds a hard money lender.  He gets in contact with the lender, describes the details of the property he wants to purchase, and they draft an agreement.  As is common with hard money lenders, his mortgage’s interest rate exceeds industry standards.  Additionally, it’s a short term loan, and he is required to make lump-sum payments periodically, each consisting of roughly 1% of the total loan value.

Seller financing, partnerships, and hard money lenders are all realistic investment options for anyone who is interested in purchasing real estate but suffers from bad credit.  The loans are expensive, and convincing someone to commit to a partnership or to provide seller financing aren’t easy tasks.  Nonetheless, these challenges can be overcome.  Every single day, professional investors around the nation purchase properties without utilizing their credit scores, and most, if not all, will use one of these three creative financing techniques.  Investing in real estate with bad credit is unquestionably achievable.

– Abhi Golhar
Contributing Writer / Host of Real Estate Deal Talk

Connect with Abhi:
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