Hard money loans are a great alternative for real estate borrowers with less than stellar credit or those who don't have enough financial history to qualify for a bank loan. That doesn't mean that hard money lenders don't conduct credit checks. It just means that your credit score is less likely to be a deal breaker. Here's why...
A hard money loan is a private, non-institutional loan secured by a hard asset—usually real property--rather than the borrower's credit worthiness or "soft" attributes. Often referred to as bridge, construction or acquisition loans, these loans enable borrowers to access funds more quickly so they can take advantage of a hot real estate opportunity.
These short-term loans are particularly popular in the residential fix and flip market. Private lenders understand that you need access to funds fast, and they know that--with the right purchase price, renovation plan and exit strategy--that they will be paid off on time. In addition to responding quickly, private money lenders can also be more flexible with their terms when the strength of the real estate transaction warrants it.
What Hard Money Lenders Look For
So, while credit checks are still part of the due diligence for hard money lenders and you may be asked to explain your low credit score, the lenders are more focused on:
Real Estate Fundamentals
First and foremost, private lenders like a good real estate story, such as a foreclosure at a great price in a relatively high-income neighborhood or a well-built, yet outdated, property in a gentrifying neighborhood.
Being able to show that you have bought, renovated and sold investment property before can help you overcome credit issues.
At Walnut Street Finance, borrowers are required to have 20 percent of equity—based on present value--in the property. High credit scores are impressive, but so is cash.
Hard money lenders will want to know that you have a good understanding of what it will cost to turn the property around and that your estimated ROI is realistic.
Here's a case in point of credit not getting in the way of Walnut Street Finance making a loan. A borrower who came to us was aiming to purchase a property that had seen better days in a great up-and-coming area of Washington D.C. The location had tons of potential and the price for the property was awesome. There was structural damage, so many people didn't want to touch it. But it had so much possibility!
The borrower was an experienced fix and flipper who knew the business inside and out.
His credit score, however, was in the 400s!
His credit had taken a hit from various deals that went sideways, personal difficulties with bankruptcy, etc. There was no way he would qualify for a bank loan and honestly, we had to give the deal a once over before feeling fully comfortable to dive in.
However, we looked at the big picture--the property, the location, the experienced borrower--and we decided to do it. Plus, the borrower's prompt response to our requests for information and the ease of communication made us all the more comfortable to do the deal. He wins. We win. Success story.
Hard money loans may be just the answer for investors who would have trouble meeting an institutional lender's stringent credit requirements.
Think you have a good real estate story? Tell us about it. Walnut Street Finance provides hard money loans and other non-bank financing options for fix and flip opportunities in the Washington, D.C. area.