Hard Money & Your Credit Score: What You Should Know. Hard money lenders are known for accepting applications from people with less than perfect credit, but what does that really mean? If you’re looking for your first loan from a private money lender, are you able to totally disregard your credit score? If so, then how does that work? If not, what threshold do you need to meet? There are a lot of questions and not always a lot of answers when it comes to private loans and alternative financing tools, and the answers aren’t always clear. Let’s explore some of the basics.
Do Hard Money Lenders Care About Credit Scores?
Yes, your bridge loan provider will care if your credit score is high or low. There aren’t always minimum thresholds you need to meet to qualify for a loan, though. While hard money lenders California check FICO scores and consider their implications in an application, they do not base the decision primarily on them. Instead, credit scores are generally used to calibrate financing charges, set minimum and maximum term lengths, or adjust the LTV offered to a borrower. In extreme cases, a credit score could disqualify an applicant whose income and collateral equity are already on the edge, but if both of those criteria are met easily then the credit score is rarely the make or break factor in an approval decision.
Why Is Equity Important in Hard Money Lending?
When it comes to debt and lending, risk assessment is generally handled by looking at what professionals call the three C’s:
- Credit score, either business or personal, sometimes both
- Collateral equity, the value in the property secured by the loan
- Capital, either in the form of reserve savings or income
When you’re seeking bridge loans for real estate, lenders generally look at income over savings. It makes sense, because your capital on hand is generally getting used for improvements. Since residential bridge loans are generally offered at around 70% LTV, though, you will need enough savings on hand to cover the down payment and improvements, as well as the income to cover the loan payments. By making sure there you have equity in the property, the lender is able to lower the emphasis on credit scores because the risks of nonpayment are covered by the lender’s ability to resell the property with the knowledge that it should bring a price high enough to cover the loan.
Where Can Investors Find Hard Money Loans?
Finding your first hard money lender can be the biggest challenge. While there are a lot of places to go, not every lender offers a cost-effective product or features that suit your exact investment plan. Some have longer term windows than others, and some have limits on property values that might not work for you. It helps to start with private money firms that have a reputation for supporting the industry with products designed to work for the investor, helping to control costs so you can get the job done and get your property back on the market. Start by looking at established, California-based products like North Coast Financial hard money loans.