Traditionally, an individual’s credit score plays an important role in determining his or her ability to secure a loan. For most traditional lenders, such as banks, higher credit scores significantly increase a person’s chances of successfully receiving financing, while lower scores can make securing a loan difficult, if not impossible.
In contrast, hard money lenders are typically much less concerned with an individual’s credit score and more focused on the value of the asset as the primary factor to receiving financing.
As a result, it’s easy to assume hard money loans are suitable only for individuals with low credit scores because they lack other alternatives. In fact, hard money financing can represent an attractive source of financing for borrowers, no matter their credit score.
Different Approaches to Credit Score
Hard money lenders are primarily asset-based lenders (real estate) who often care more about the value of the actual collateral rather than the borrower’s ability to repay the loan. For this reason, such lenders are much less reliant upon credit history and other cash flow and income metrics in their evaluation and underwriting of a loan.
With this approach, in the event of default, hard money lenders will seek to foreclose on the real estate asset and ultimately sell the asset to recover their investment and potentially incur a profit on the transaction.
In comparison, banks and other institutional lenders are equally concerned with the borrowers themselves and their ability to repay any loans from ongoing income and other assets. A credit score is an easy way to evaluate a person’s historical ability to effectively repay credit. Therefore, banks are much more reliant on the borrowers, rather than the asset, to recoup their money. This leads to a more conservative nature of bank lending that traditionally only benefits high credit score borrowers.
Although lower credit scores rarely affect one’s ability to secure a loan from a private lender, they can impact interest rate offerings. There’s a higher amount of risk for a lender with a borrower who has a low credit score, which typically results in higher interest rates.
Why Hard Money Loans Work for All Credit Scores
Many view hard money loans only for borrowers with low credit scores and no ability to secure a loan from traditional bank financing. In reality, hard money loans can work for everyone.
Anyone who has secured a loan through traditional financing knows that it’s far from the quickest process. Typically, the entire loan process could take anywhere from 1-3 months, depending upon a variety of factors – verifying income, reviewing bank statements, etc.
Securing a loan through a private lender can be completed in a matter of days since there is more focus on the collateral and less attention paid to an individual’s financial standing.
As a relationship builds between a borrower and a private lender, it enables repeat borrowers to close deals even quicker, which can be a competitive advantage for buyers in a multiple-offer real estate situation. Traditional financing, on the other hand, requires the same tedious process, no matter how many times a borrower goes through the same bank for a loan.
In addition to securing and closing on a loan faster than traditional financing, hard money lenders are also able to lend a higher loan amount and reduce the financial burden of the borrower.
For example, a bank would look at the property’s current “as-is” value and provide a loan to the borrower for approximately 65 percent of the current value.
Hard money lenders, such as Bay Mountain Capital, structure their loans differently. Instead of evaluating the property’s present-day value, BMC looks at the property’s value after the rehab (ARV) and lends up to 70 percent of the property’s ARV. With this approach, BMC can typically lend a much higher percentage of the total purchase and rehab costs.
In short, banks aren’t interested in taking on the risk of “what if” scenarios and hard money lenders will. Therefore, borrowers are able to bring less money to the closing table.
When it comes to securing a loan for a real estate investment, we’re frequently reminded of the importance of credit scores. And while credit scores are valuable in specific situations, they do not make the final determination for loan approvals from hard money lenders.
With this flexibility, hard money lenders are able to offer a streamlined loan process that allows borrowers of all credit scores to secure financing and engage in multiple real estate investments.
About Bay Mountain Capital:
Bay Mountain Capital has been in business for more than a decade, closing approximately 2,000 loans over that time period. We specialize in financing all types of residential and commercial property investments throughout Texas. Using common sense and value-added approach, we strive to incorporate these principles into our underwriting and closing processes.
As a direct lender, Bay Mountain Capital can close a loan within one day after receiving a clear title and a complete file. The process generally takes from two to three weeks but can be accelerated where circumstances require it.
We are an asset-based lender, which means that qualification requirements are limited. Our rates and fees are among the lowest in the industry.