Yes, hard money lenders will check your credit score when they underwrite your loan application.
A hard money loan is indeed more asset-based compared to a traditional bank loan, so your credit score is usually not the main factor that determines approval.
Still, your credit history will affect whether you qualify at all and how much the lender will likely be willing to fund.
Hard money lenders want to be paid, at the end of the day, so they will want to see how you handle debt. Your credit report helps answer that question.
Why do hard money lenders still review credit scores and histories?
The simple answer is that your past borrowing behavior says a lot about how risky it is to lend money to you.
If you have maintained strong credit for many years, the lender has a reason to believe that you will take repayment seriously. This alone will not guarantee approval, but it can strengthen your file.
In contrast, if you have a pattern of late payments, the lender might see your application as being riskier.
Having older credit issues (problems that happened many years ago) may not matter as much, especially if the property has strong equity.
But any recent delinquencies can make a lender question whether you will make payments on time during the loan term.
To be clear, hard money underwriting is not the same as bank underwriting. Banks right away reject borrowers if their credit scores fall below a rigid threshold.
Hard money lenders are more open; they may still review the deal if the collateral is strong enough and if you’re prepared to put more cash in the deal.
Good credit makes your exit plan more believable
Hard money loans are usually meant to last only 6 to 24 months, so the lender wants to know how you will repay the loan before the term ends.
For example, do you plan to renovate a small multifamily property and then lease the improved units at higher rents, and then refinance once the property produces more income?
The hard money lender will look at two things: (1) the future value of the property and (2) whether your credit profile can qualify for permanent financing when the hard money loan reaches maturity.
What credit score do you need for a hard money loan?
There is no single credit score required for every hard money loan. But in general:
- For smaller or simpler projects, you will need a credit score of at least 600.
- For larger commercial projects and major renovations, as well as for deals that depend on refinancing after stabilization, the lender may want stronger credit.
So in general, the more your payoff plan depends on bank financing, the more important your credit profile is.
What do hard money lenders evaluate beyond credit?
Poor credit will not automatically disqualify you from a hard money loan, but the lender will expect more strength elsewhere in the file.
Property value
The lender will want to know what the property is worth today and what it may be worth after your plan is complete.
Show how you reached your value estimate. If you are buying the property, use the purchase price and recent comparable sales to demonstrate that the deal is not overpriced.
If the property already produces income, use the rent roll to show whether the current income supports the value you are claiming.
You will also likely need to put enough of your own money into the deal to give the lender a safe equity cushion.
If you ask the lender to fund too much of the purchase price or project cost, the loan becomes riskier for them, and they might decline the request.
Repayment capacity
The lender will also want to know how income from the property will cover the loan payments before you sell or refinance.
For an income-producing commercial property, the lender may look at the:
- current rent
- occupancy
- operating expenses
- available reserves
For a non-stabilized property, the lender may look at your liquidity and project budget.
If the property cannot cover the monthly interest, you need to show that you have enough liquidity to carry the loan until your exit plan works. Be ready to explain how you will cover the shortfall.
Collateral strength
Collateral strength boils down to these:
1. Is there enough protective equity? Hard money lenders rarely lend more than 65% to 70% of the property’s value.
This gives them a 30%+ equity cushion so that if they have to foreclose and sell your property at a deep discount, they still recover their capital.
2. Can they unload the asset quickly? Properties with a deep buyer pool and stable cash coming in, such as leased apartment buildings, are considered strong collateral because many other investors will be interested in buying them.
But more narrow-use properties like specialized warehouses are often (though not always) considered weaker collateral because they could take longer to sell.
The lender knows that they may have to carry taxes and insurance while the asset is still on the market.
3. Is it “clean”? The lender doesn’t want to inherit a lawsuit waiting to happen. So if the property has serious environmental or title dispute issues, they may decline the loan.
What is the best way to strengthen your application for a hard money loan if your credit is weak?
Don’t try to hide your less-than-stellar credit score. Hard money lenders will find the issue during underwriting, anyway. Trying to bury it will only damage trust.
Instead, prepare a short explanation for any major credit problem that might be blemishing your file.
Did the issue stem from a one-time event, like a construction delay?
Say so. If the problem is fairly recent and has been resolved, explain what changed and how you plan to prevent missed payments during the loan term.
You can also strengthen the file by bringing more cash to closing or reducing the requested loan amount.
If you can show the lender that the credit issue doesn’t define the deal, they may look past the score.
Read Our: Detailed Guidelines on Hard Money Loans
Talk to Private Capital Investors
Hard money lenders do check credit, but they usually don’t treat credit the same way a traditional bank does. You may still qualify if the deal is strong.
Our team here at Private Capital Investors can review your loan request and determine if our hard money loans or any of our private financing solutions make sense for your situation. Call us at 972-865-6205 or fill out our loan request form.
