Hard Money Loans and Credit Reporting, Explained
In most cases, a hard money loan will not appear on a borrower’s credit report. Despite this, some lenders may report your loan to one or more of the major credit agencies. If you are worried about a hard money loan impacting your credit score, you should ask your lender whether they report your credit score. While your loan may not appear on a credit report, it can still often be found using an asset search or background check.
Overall, a borrower’s credit score is not the biggest factor for hard money lenders when deciding to approve a loan. Instead of focusing on the borrower’s financials, hard money and private money lenders focus more on the property's value as collateral for the loan. Many hard money lenders advertise that they don’t check credit at all. However, borrowers can often get lower interest rates and pay fewer origination points if they have a good credit score.
In addition, certain hard money loan types, such as ground-up hard money construction loans, 90% or 100% LTV hard money loans, long-term hard money loans, and soft money loans, may require credit checks. This is because these loans are much riskier for lenders when compared to traditional hard money financing.
Hard Money Loan Defaults and Credit Score Reporting
There is one major exception to the rule of thumb that hard money loans don’t appear on credit reports. This is if you default on your hard money loan. In this case, a lender is well within their rights to report you to the credit agencies, and such a loan default could have a severely negative impact on your credit score.
Credit Score Reporting for Hard Money Lenders Offering Conventional Loans
Some hard money lenders don’t restrict their lending activities to hard money financing. Some offer conventional loans, non-QM loans, and even VA or FHA loans. These loans, in the vast majority of cases, will show up on a borrower’s credit report. So, just because a lender is labeled as a “hard money lender,” not all of their products may have the same consequences for credit reporting.
In general, if a loan is issued for an owner-occupied property, there is a greater chance that a lender will check the borrower’s credit and potentially report the loan to the credit agencies. They will also often look at the borrower’s debt-to-income ratio (DTI), which is often not considered for other hard money loans. This is because owner-occupied loans require the borrower to pay the mortgage out of their income, rather than the rental income provided by a third-party tenant, which can more easily be evicted and replaced should they fail to pay their rent.
The Future of Hard Money Loan Credit Reporting
While hard money loan’s generally don’t appear on credit reports today, this could change soon as the lending industry evolves, particularly if hard money loan defaults increase. Reporting hard money loans to the credit agency could give borrowers more incentives to avoid defaulting on their loans.