If you want to make some money in the real estate market but don't have the credit score to secure a loan, then you should turn to a hard money lender.

With the real estate market improving by leaps and bounds of late, it’s not very surprising that real estate investors are keen to get back in on the action. Prices are on the rise, which means savvy investors can find ways to buy low, sell high, and earn a tidy profit along the way.

Of course, just because investment opportunities are abundant doesn’t mean that financing for such undertakings is readily available. At the moment, it’s still pretty difficult to secure home loans with bad credit.

Whereas traditional lenders were handing out loans with no money down like candy before the financial collapse that sparked a worldwide recession, the purse strings have tightened considerably since. Banks are starting to loosen up a little now that we’re in full economic recovery, but a bad credit mortgage is still hard to come by.

Luckily, there are hard money lenders in California, New York, and other states willing to provide the capital needed for real estate investments, despite bad credit, if there is money to be made. Who can secure such loans, though?

If you’re interested in using the growing real estate market to further your own financial interests but your credit doesn’t allow for traditional avenues of lending, hard money loans could be the solution you’re seeking. Here are a few of the most common used for hard money loans.

Short-Term Loans

Before we get into the types of real estate investments that are most compatible with hard money loans, it’s important to understand that there are rather specific parameters associated with such lending, namely the fact that hard money loans are short-term in nature. If you’re looking to buy a house and hang on to it for several years, hard money loans probably aren’t for you.

Such loans are typically granted for about a year, although the terms could extend to 2-5 years, at which point you have to repay or forfeit whatever collateral you used to secure the loan (perhaps equity in another property). Because these loans are funded by private investors who want to see relatively quick returns, you must have a plan for earning speedy profits on your real estate venture if you want to secure a hard money loan.

Bad or No Credit

Hard money loans are also typically used by borrowers that don’t have very good credit. With a top tier credit rating, you could reasonably gain approval from a traditional lender for your real estate purchase, and most people find this preferable because such loans tend to come with more favorable terms for repayment (20-30 years instead of 1-2 years, for example, as well as lower interest rates on average).

However, a lack of credit doesn’t necessarily have to stop you from investing in real estate. Private money lenders in California and beyond are happy to ignore poor credit so long as there is plenty of capital and/or collateral on the table.

Hard money lending is based on value, or more specifically, loan to value (LTV) ratios. Private money lenders will usually offer a loan for 65-75% of the value of the property in question. This means you have to come up with 25-35% of the value in down payment.

You may also have to provide collateral and/or a solid plan for earning a quick profit on the property, and you’ll face higher interest rates than you would with a typical bank loan. This is the trade-off for making a real estate purchase with poor credit.

Hard Money Loan Uses

Because of the parameter surrounding hard money loans, they are generally intended for certain types of property purchases. This could include buying residential or commercial properties with the intention of fixing and flipping them.

Hard money loans could also be used for land loans (if you intend to develop), construction loans, or other investments that will pay off quickly. Keep in mind that hard money loans are like other types of lending insomuch as you have to make monthly payments with interest (although you may find terms for interest-only payments).

The difference between traditional and private money loans, however, is that within a year to five years you’ll have to make a massive balloon payment on the remainder of the loan. So you better go in with a solid plan to realize speedy returns on your investment or consider seeking out other types of lending.