To begin with, there is a lot of confusion out there when it comes to Hard Money Lenders. Every one of us works a little differently. The question: Do you need a good credit score for a Hard Money Loan? The answer: Yes and no!
It is true that a Hard Money Loan is based more on the property's value for the credibility of the loan. However, investors who secure the loan still like to see good credit as well as assets and a good income from the borrower. What this does is sweeten the pie! With all the borrowers out there who are looking for Hard Money Loans, investors can pick and choose whom they lend to. That's not to say that a 500 Fico will not get you the loan. Investors will still lend on a 500 Fico, but the interest rate many times is higher due to the risk.
It's very competitive out there for Hard Money Loans for the borrower. All things being equal, a good Fico along with many other factors can be advantageous to a better interest rate with Hard Money Loans.
In any event, a Hard Money Loan is still a high interest rate endeavor weather you have a 750 or a 550. The thing I've never understood is this idea of mitigating risk through % increases. If I'm a 550
Credit score, and I take out a 200k loan from you for 12 months, am I more or less likely to make the payments if they are more expensive or less? To Add, id also say that if Someone did default on this loan, your company is still out 200k. Regardless of the couple grand said person may have paid back or not. I would say that having a couple hundred thou in the bank would make me feel better about lending too. But at the same time I'd figure they can afford it, charge them for it. And again, if they default, the bank or investment company is still out the entire principle - the very few grand they may have collected on the payments side....
Things aren't this way though. And my credit is good, so I typically don't have to worry about it. But it never really has made much sense.
Allow me to help you understand the Hard Money Process a little better. When we loan money in what is known as a Hard Money Loan, we are working with investors. These investors have "Private Money", meaning their own money to lend. (The funds can come from Hedge Funds as well). As such, they are looking to make a profit on what they lend. Having a good credit score does matter! Investors aren't as shy about lending their money if a borrower shows financial responsibility. A borrower who applys for a Hard Money Loan cannot go through a bank to be qualified because they:
1. Have less than perfect credit
2. Are self-employed and cannot verify their income
3. or short time on the job
Due to these main factors and other considerations, borrowers will go the Hard Money Loan way. Keep in mind Hard Money Loans are for non-owner occupied properties and are to be used for business purposes such as fixing/flipping the property.
As far as if the borrower defaults on a 200K loan, No we don't lose that money. The property is the "security instrument" in the loan. This means that if a borrower defaults, we foreclose on the property. Hard Money Lenders such as us, mitigate our potential loss by making loans based more on the property value than the borrower.
In short, when I lend, my decision making process is around equity and exit strategy. I don't care what the borrower's credit score is as long as they have an equity and exit strategy. I want to see that the borrower is successful so we can do more business together. I will not lend to them if the numbers don't make sense for the borrower. I want them putting in at least 20% if not 30%, but it can be private money, and have a strategy for paying back the loan. I want them to buy at a price that will support, rehab, holding costs, commissions, etc and have a worthwhile profit for the borrower. This in turn will make it a secure deal as a lender because the property has at least some equity, has some flex room for mistakes and has a plan to payback. Without any equity or an exit strategy, the probability for failure is too high.
I agree. It has to make sense for the borrower and the lender. Equity is the key!
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