Run a cursory search for information about hard money loans and you will discover plenty of references to the idea of securing hard money even with bad credit. It is no secret that credit scores aren’t a big deal to hard money lenders. They are concerned about other things. Have you ever wondered why?
Apply for a mortgage and your bank or credit union will leave no stone unturned in its attempt to learn every detail about your financial life. Some will even dig deeper than your finances alone. They will want to know as much about you as possible. Indeed, your bank or credit union will not let poor credit slide. Hard money is a different matter.
Different Business Models
Hard money and conventional lenders treat credit scores differently because they operate on different business models. In a conventional lending scenario, a bank or credit union is required to evaluate a borrower’s creditworthiness by doing a deep dive into the person’s financials. By the way, they have no choice. Federal law requires them to do everything within their power to guarantee borrowers can afford to borrow.
What you have is a lending model that puts a heavy emphasis on the borrower’s full faith and credit. Another way to put it is this: the borrower makes a good faith promise to repay what is borrowed. Meanwhile, the bank looks into the borrower’s credit and financial history to determine whether that promise is worth the paper it will be printed on.
A hard money lender’s business model is different. They don’t lend based on full faith and credit. Instead, they lend on collateral. Any borrower interested in hard money must put up a tangible asset as collateral. That asset must possess enough value to cover the amount borrowed. If the value isn’t there, the loan will be denied.
Different Regulatory Frameworks
By now you might be wondering how hard money lenders can operate under such a starkly different business model without running afoul of the law. It’s simple. Hard money lenders are private lenders. They are not licensed financial institutions required to follow federal banking laws. Rather, they are private companies regulated by the states.
Salt Lake City’s Actium Partners must follow all the rules and regulations in Utah to write loans to Beehive State borrowers. Likewise, they must follow the applicable laws in Colorado and Idaho when they write loans in those two states.
Being regulated by states gives hard money lenders more freedom and flexibility. They can make asset-based loans without putting too much stock in a borrower’s credit score.
Credit Score Affects Other Things
This is not to say that hard money lenders don’t look at borrower credit scores at all. Quite to the contrary, most of them do. But their purpose for looking into a borrower’s credit score is not related to loan approval. It is related to interest rates and terms.
Just as with conventional lending, a poor credit score can mean higher interest rates and shorter terms on a hard money loan. The worse a borrower’s credit score, the more unattractive rates and terms are. It has to be this way to mitigate lender risks. Even so, a poor credit score will not automatically sabotage a loan application as long as the borrower puts up a high-value asset as collateral.
It is true that hard money loans can be obtained even with bad credit. Borrower credit scores are not so important to lenders more interested in asset value. If you have the assets, you can get financing. That is pretty much it in a nutshell.