Hard Money Loans and Credit Checks, Explained
Some hard money lenders check credit scores, while others do not. Hard money lenders often provide multiple loan programs, some of which don’t require credit checks, and others require credit checks and minimum credit scores. For example, a hard money lender may have a basic loan program that does not require a credit check but may also provide a “soft money” loan program that does require a credit check.
The soft money program will generally have a significantly lower interest rate and lower origination fees (or points) than the basic program, due to the lower default risk that the borrower presents to the lender.
Hard Money Loan Credit Requirements
Many hard money lenders advertise that they do not require credit checks, but why? In general, hard money lenders don’t focus on a borrower’s credit score, instead, they focus on the value of the property as collateral for the loan.
Hard money loans are a type of asset-based mortgage, meaning that the lender focuses on the asset’s value rather than the characteristics of the borrower. In addition, hard money loans are full-recourse loans, which means that, just like with a traditional home mortgage, the lender can attempt to repossess the borrower’s personal property if they default on their loan.
However, if a hard money lender does check your credit score, they will often prefer to see 600 or higher. This is still significantly lower than the 660-700 that most traditional lenders require. Hard money lenders offering longer-term loans, such as 30-year loans, may require higher credit scores.
Getting a Hard Money Loan With Bad Credit
While it’s true that many hard money lenders don’t check credit scores, no credit check hard money loans, in addition to facing higher interest rates, also have higher down payment requirements. For example, a borrower with bad credit may only get a loan up to 60% LTV, while a borrower with great credit may be able to get an 80% LTV loan. As previously mentioned, origination points could be higher for a borrower with bad credit when compared to a borrower with great credit.
Hard Money Construction Loans and Credit Scores
While credit scores may not be important for most types of hard money loans, hard money construction loans are often an exception to the rule. Since construction loans are significantly riskier than loans for property acquisition or even fix and flip property financing, lenders often want extra assurances that the borrower is less likely to default on their loan.
Credit Scores for 100% Hard Money Loans
Another type of hard money loan where credit score can be important is an 100% LTV hard money loan. Just like a construction loans, 100% LTV hard money loans, which are provided by quite a few hard money lenders, are quire risky for the lender. For example, if the value of the property were to drop at all, even by just 5%, the sale of the property would not cover the outstanding loan amount.
Getting Around Hard Money Loan Credit Requirements
Just like other types of loans, if your hard money lender requires a credit score higher than you currently have, you can get someone to co-sign the loan. This can be a friend, family member, or business partner. Unless a close family member simply wants to do you a favor, it can be challenging to find a co-signer. However, one way to attract a co-signer for your loan is to offer them a small amount of equity in the property. This will compensate them for taking on the risk of being liable for the loan. You can also (or in addition) pay them a sponsorship fee up front for co-signing the loan.