One of the most popular forms of loan in fix and flipping is private mortgage lending or hard money lending. If you want to start a fix and flip business or invest in real estate but you have a low credit score, private mortgage lending may be an enabling option for you.
Hard money lenders are private individual lenders who loan money to real estate investors and house flippers who own property. The most crucial difference between a traditional lender and private lenders is that they care less about the individual’s credentials as a borrower (or credit score) but more about the individual’s property. This is because they use the latter as a collateral if anything goes wrong.
One of the reasons why private mortgage loans are so popular amongst fix and flippers is because of the short-term nature of the business. Banks usually don’t like to lend on the short-term because they stop making money once the debt is paid off. On the other hand, private mortgage loans usually last 1 to 12 months, which is roughly the amount of time fix and flippers take to buy, renovate and sell a house.
Although they may have costlier interest rates than traditional financial institutions, private mortgage loaners are more convenient to use for fix and flipping. Because you are not dealing with a large institution that has to operate through rules and regulations, private mortgage loans are easier to access, quicker to process and more flexible.
However, private mortgage loaners are not cheap. Interest rates for private mortgage loans are usually around 8 to 16%, depending on who you work with. In addition to this, you may have to pay 1 to 5 % of the sale price of the home to the lender. But it is one of the best options available to you if you are starting out in the fix and flip business with no credit score to have traditional financial institutions to back you. Taking a private mortgage loan can be a good way to build your credit score for more traditional loans in the future.
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