Hard Money Loans and Bad Credit

With many banks redefining credit ratings and underwriters requiring higher credit scores than in traditional year’s past, many people with poor to moderate credit ratings are seeking loans from hard money lending institutions.

Fortunately, hard money lenders understand the difference between personal credit and focusing on the equity and income associated with the property loan they are securing. While most hard money lenders do not have endless funds, they typically do lend to companies and individuals with better credit ratings before those with poor scores. However, when factoring in loan approval, there are a number of areas hard money lenders analyze.

Simply stated, hard money lenders are looking to make money, not lose their investment portfolio. They understand that to maximize profits, they have to take greater risks. This is where most traditional banks don’t see eye-to-eye with private lenders. Traditional lending institutions are required to follow a general guideline to approving borrowers, and in today’s downturned economy and financial crisis, are not permitted to deviate from the rules and regulations set forth by the government and each institution.

However, and this is where hard money lenders come into play, a bank looks at the individual requesting the loan. A hard money lender looks at the potential profit and the investment itself. They don’t simply look at the person sitting in front of the desk requesting the loan. They analyze each scenario based on asset loan financing. While hard money loans charge higher interest rates than banking institutions, these types of loans are only designed to be in effect for a few months to a few years. These aren’t standard 30-year traditional mortgages. These are loans designed for investment properties and real estate developers.

Hard money lenders also provide bridge loan financing for both commercial and investment properties. This type of financing is necessary when a property is currently at a point where it will not quality for a traditional form of financing, perhaps being due to a distressed property sale, repairs or foreclosure proceedings.

Instead of analyzing credit scores, income and other forms of conventional lending criteria, hard money lenders qualify borrowers based on the value of the real estate that is being offered as collateral. On average, most hard money lenders only lend between 65- to 70-percent of the LTV (Loan To Value) ratio.

This means that despite a borrower’s credit, most hard money lenders expect the following:

• 65-70% Hard money in a conforming loan
• 20% Borrower’s contribution and equity to the project
• 15% Seller/owner financing or another form of subordinated loan

Tedious state and federal laws do not regulate hard money lending, although some states do require restrictions on interest rates charged to borrowers. Borrowers that are interested in pursing hard money lending, and have poor credit, may contact Loan Funding Co. for additional hard money loan information.