One of the most commonly asked questions about hard money loans is whether or not applicants with bad credit can get their deals funded. In order to understand what role credit plays in being approved for hard money loans, it’s important to understand what hard money lenders are actually looking for from investors.

How Important Is A Borrower’s Credit In The Underwriting Process of Hard Money Lending?

How Traditional Lenders Fail Investors with Bad Credit

Traditional lenders provide funding for the majority of financed real estate transactions out there. They loan up to 80% of the home’s purchase price, and with certain types of loans, well over 90%.However, there are three problems facing investors looking to receive a traditional mortgage:

  • Institutional lenders only lend on the purchase price of a property, not its true value.
  • Institutional lenders won’t lend on properties in disrepair or that they couldn’t liquidate without making improvements
  • Institutional lenders put a huge amount of weight on the applicant’s credit score.These loans are fine for people with perfect credit trying to flip an undervalued home in perfect condition, but that is only a small fraction of all real estate investors. Especially considering all of those who saw losses following the housing collapse.

What Hard Money Lenders Look For

When it comes to hard money lenders, however, they follow different criteria for underwriting loans. Sure, they do take credit score into consideration, but they also look at a number of other factors including:
  • The after-repair value of a property
  • Your history with real estate investing
  • Your willingness to invest your own money into the project
While having good credit will definitely help in acquiring a hard money loan, bad credit alone won’t eliminate your chances. Hard money lenders are more concerned with the big picture rather than a single metric like the institutional financiers are.

Tips for Getting a Hard Money Loan Approved with Bad Credit

So you have bad credit and want to maximize your chances of having your loan application approved? Here are three tips to help you get funding:
  • Be Thorough with Your Due Diligence – For hard money lenders, the investment opportunity is the number one priority. If you have a good-enough proposition, you’re going to get funding. By being thorough with your due diligence, you will not only be sure that you’ve discovered a great deal, but will also be able to walk the hard money lender through your reasoning as well.
  • Be Able to Explain Credit Problems – Hard money lenders do care about your credit history, but they’ll be a lot more understanding than institutional underwriters. If you have a poor credit score because of extenuating circumstances or are able to explain why problems arose (and aren’t likely to again), you’ll likely be shown some leniency.
  • Provide Peace-of-Mind to the Lender – If you want a private investor to fund your project, you need to show them that you’re serious about its success. This can be done by being willing to contribute your own money towards the project, and by having a detailed exit strategy showing how you’ll be able to make both monthly payments and the final payoff when it’s time.Even with perfect credit, there is no surefire way to get your loan application approved. But by following these three tips, you can greatly improve the likelihood of having your investment funded.
Yes, hard money loans are available to borrowers with bad credit. Does that mean that a poor credit score doesn’t matter? No, but it’s much less important to hard money lenders than it is to major financial institutions. Instead, hard money lenders are often willing and ready to approve financing on deals that make sense on paper and in practice, and are willing to judge each proposed project based on its viability rather than just on your past financial history.

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