Real estate investors often use loans funded by private “hard money” lenders to purchase and rehab properties. Hard money loans are generally easier to qualify for than traditional bank loans because they’re based on the value of the purchased property, not the borrower’s creditworthiness. However, private lenders still typically require borrowers to have a minimum credit score before approving any typo f loan.
What Does a Hard Money Loan Mean?
Hard money loans are a specific type of asset-based loan financing instrument through which a borrower like you receives funds secured by real property. Private investors or companies typically issue such loans.
Bridge loans, development loans, investment property loans, and construction loans are all different types of hard money loans. The term “hard money” is used in contrast to soft money, which refers to funding not backed by collateral.
Unlike traditional mortgages, hard money loans are often shorter than soft money loans and carry higher interest rates. Private lenders give these loans for investment purposes, such as purchasing a fix-and-flip property.
Borrowers who cannot obtain traditional financing may turn to hard money lenders for funding. And they can be easier to get for borrowers with bad credit or who are otherwise unable to qualify for a traditional loan.
What’s the Importance of FICO Scores in Hard Money?
A FICO score is a numerical representation of an individual’s creditworthiness. The score ranges from 300 to 850, with the higher number indicating a better credit score.
A borrower’s FICO score is one of the factors that a hard money lender will consider when deciding to approve a loan or not. Borrowers with a higher credit score are generally seen as being less of a risk and may be able to obtain a loan with more favorable terms. You can also get one free credit report from each of the three credit reporting bureaus, namely, Experian, Equifax, and TransUnion, once a year.
How Does Credit Affect Hard Money Loans?
Hard money lenders will typically require borrowers to have a minimum credit score before approving a loan. The minimum credit score required will vary by lender but is generally 640 or higher.
Borrowers of commercial loans with a lower credit score may still be able to obtain a hard money loan, but they may be required to provide a larger down payment or pay a higher interest rate.
Should I Be Concerned About Money Loans Showing Up on Credit Reports?
Hard money loans are not typically reported to the credit bureaus and will not appear on your credit report. However, if you default on a hard money loan, the lender may report the delinquency to the credit bureaus.
This could harm your credit score. So, if you’re considering a hard money loan, be sure to factor in the risk of damaging your credit score if you default on the loan.
What Are the Key Advantages of Hard Money Loans?
There are several key advantages of hard money loans, including:
- Hard money loans are asset-based, which means the value of the property being purchased is looked at, not the borrower’s creditworthiness. This can be beneficial for borrowers with bad credit or who are otherwise unable to qualify for a traditional loan.
- Hard money loans are often shorter 100% loan-to-cost than traditional loans, which can be beneficial if you’re looking to quickly purchase and sell a property at competitive rates.
- Hard money loans can be easier to obtain than traditional loans with transparent low-cost fees available from Quick Lending.
- Hard money loans can be used to purchase various properties or transactional financing, including investment properties, fix-and-flip properties, and more.
When Should You Be Not Looking for a Hard Money Loan?
There are a few situations when you might not want to seek out a hard money loan, including:
- If you’re not sure you’ll be able to repay the loan. Hard money loans typically come with higher interest rates than traditional loans, so they can be more expensive to repay.
- If you don’t have a solid plan for the property. Hard money loans are typically used for investment purposes, so you should have a solid plan for the property before taking out a loan.
- If you’re not comfortable with the lender’s terms. It would be best if you made sure to review the lender’s terms and conditions before taking out a loan to make sure you’re comfortable with the agreement.
Hard money loans are an excellent option for borrowers who cannot qualify for a traditional loan. However, it’s essential to understand the pros and cons of hard money loans before taking one out.For more information on qualifying for a hard money loan, contact Quick Lending – Your Houston Hard Money Lender today. Our team of experts will help you navigate the process and get the financing you need to purchase your next property.