Do Hard Money Lenders check credit? (2024)

FAQs

Do Hard Money Lenders check credit? ›

With hard money loans, a lender approves a borrower based on the value of the property being purchased. The lender may superficially check your credit or finances, but, in general, the process will be much less rigorous than with a traditional loan.

Credit Score Requirements

As previously mentioned, while hard money lenders do not put as much emphasis on credit score or history, it still is a critical component of the application process. The lower the credit score, the higher the interest rate may be.

Hard money loans are risky. This is primarily because they come with higher interest rates and shorter repayment terms, and they have limited regulations compared to typical mortgages. This means that you, as the borrower, would have very little protection or options if you needed help repaying the loan.

When a lender or company requests to review your credit reports after you've applied for credit, it results in a hard inquiry. Hard inquiries usually impact credit scores. Multiple hard inquiries within a certain time period for a home or auto loan are generally counted as one inquiry.

Hard money loans are a form of short-term financing, with the loan term lasting between three and 36 months. Most hard money lenders can lend up to 65% to 75% of the property's current value at an interest rate of 10% to 18%.

There are two primary drawbacks to consider: Cost – Hard money loans are convenient, but investors pay a price for borrowing this way. The rate can be up to 10 percentage points higher than for a conventional loan. Origination fees, loan-servicing fees, and closing costs are also likely to cost investors more.

Most lenders use FICO® scores from all three credit bureaus when evaluating your loan application. Your score will likely be different for each credit bureau and there may be errors on one that don't appear on the others.

When you default on a hard money loan, you'll have a short amount of time to bring the loan current while dealing with financial penalties such as late fees and/or default rates. Unless you quickly bring the loan current or negotiate new loan terms with the lender, the property will enter foreclosure.

They all did this because they understand how important it is to have your money work hard for you. One of the biggest advantages to Hard Money Lending is that it is passive. That keeps your time free to earn money or enjoy life while you let your investment dollars work hard for you.

At the end of the day, hard money can be an effective cash substitute in real estate transactions, but it is not the same thing as cash. It is a loan that must be repaid with interest, and it is typically used as a short-term financing solution for 6-12 months.

What will fail a credit check? ›

You have late or missed payments, defaults, or county court judgments in your credit history. These may indicate you've had trouble repaying debt in the past. You have an Individual Voluntary Agreement or Debt Management Plan. This might suggest that you can't afford any more debt at the moment.

There are three credit reference agencies - Experian, Equifax and TransUnion. All the credit reference agencies keep information about you and a lender can consult one or more of them when making a decision.

Crucially, soft searches aren't visible to companies – so they have no impact on your credit score or any future credit applications you might make. Only you can see them on your report and it doesn't matter how many there are.

In some cases, hard money lenders require inexperienced investors to have a credit score of at least 620, as well as additional collateral, such as your home or another valuable asset. A bank loan will consider your credit history, current credit score, and employment plus income information.

Most hard money lenders calculate the amount you can borrow based on either the “as is value” of your property or the “After Repair Value” (ARV). You could borrow up to 80 percent of the ARV in at least one case. A loan based on the ARV can include the repair costs along with the purchase price.

It is usually taken for a short term of 12 months to 3 years. But unlike commercial loans from banks, hard money loans are based on property being used as collateral rather than the borrower's creditworthiness. Borrowers who worry about their credit score and the long approval process may take hard money loans.

The higher your score, the more credit worthy you are. Creditors set a threshold level for credit scoring. If your score is below the threshold they may decide not to lend to you or to charge you more if they do agree to lend. Different lenders use different systems for working out your score.

How do hard inquiries impact your credit score? A hard credit inquiry could lower your credit score by as much as 10 points, though in many cases, the damage probably won't be that significant. As FICO explains, “For most people, one additional credit inquiry will take less than five points off their FICO Scores.”

Yes, it's possible to finance a vehicle purchase with a 500 credit score or even below that. Keep in mind, though, that you can generally expect limited options, as well as high interest rates and fees. If possible, try to improve your credit before applying.

When you apply for a loan, reputable lenders will check your credit. The higher your score, the more likely you are to get approved, and the lower your interest rate will be. If you have a score less than good (under 670), you likely won't get approved by most lenders.