Hard money credit questions come up a lot for us. Most people are surprised that we’re not concerned about tax returns, DTI, or verifiable income to make a loan.
Big banks weigh their risk based on the borrower, their income, credit and ability to pay. Hard money lenders like Little City Investments have the flexibility to place the emphasis on the real estate asset instead.
My credit is really bad. My debt to income ratio is crazy high. I have virtually no verifiable income on my tax returns. Can I get a hard money loan?
Yes, as long as you don’t owe money to the IRS. We base our loans on the property value, not your personal income. We do have a minimum credit score requirement but it’s really low at 525. The IRS is an exception because well, they’re the IRS. On a refinance, any debts or liens associated with the property must be paid, but the rest of your financial details won’t matter on a true, asset-based hard money loan.
I don’t have to submit tax returns or a personal financial statement?
Correct. That’s one reason our hard money loans can close in days instead of weeks. That said, we do thorough due diligence on the property. If you’re refinancing, the title commitment will reveal any debts and liens associated with the property and those will have to be paid at or before closing with us. We do check credit, but our minimum score is low. Your credit may earn you a better rate, but bad credit won’t necessarily disqualify you.
Can I really get a hard money loan if I have a recent bankruptcy? A foreclosure? A short sale?
Yes, you can have any combination of these credit problems. You just can’t owe money to the IRS. Conventional lenders require at least 1-2 years after a bankruptcy, 3-7 years after a foreclosure and 2-7 years after a short sale. We just require you have no bankruptcies within one year. With a hard money loan, your ability to pay is secondary to the value of the property. This is true asset-based lending and very different from how most people are used to qualifying for mortgage loans.
Are you serious? My credit is sub-550, I can’t even get a payday loan, why would anyone lend me private money?
We’re serious. Our loans are secured by real estate at 70% or better loan to value. We don’t like to, but if we have to foreclose, we’ll easily recoup our investment. It’s better for us when our borrowers are successful since they tend to take out more loans with us when they are. Hard money loans are a short term solution, sometimes referred to as a bridge loan or bridge funding. They’re not ideal for property you plan to hold for more than one year, so a viable exit strategy is key.
What if I have unpaid debts?
If you’re refinancing, you should be aware that certain types of non-mortgage debts, like property taxes, income taxes, city fines, utilities, judgments and contractor liens, may become attached to your property. If liens are attached to your property, you won’t be able to refinance or sell it without paying those off.
Why don’t hard money lenders care about credit?
Hard money loans are secured by real estate that’s worth more than the outstanding loan. If the borrower doesn’t pay, the lender takes the real estate. Since the property is worth a lot more than the amount borrowed, the lender’s investment is safe even if the borrower isn’t. We want our borrowers to be successful real estate investors though, so we do care about your exit strategy. With hard money credit is far less important than the equity in the property.
What’s the catch?
Most people don’t have enough equity. If a property is worth $300,000, your hard money loan maximum is $210,000. Few people get the chance to buy something at a 30% discount, but a hard money loan can be the perfect solution for those who do. It can also be useful for people who have owned an investment property for a while and need to tap their equity. You do need an exit strategy; a 1-year hard money loan won’t do you much good without one.
Little City Investments makes true, asset-based hard money loans to Austin real estate investors. We can typically close in 5 days or less on investment purchases and refinance properties in Austin from $100k to $1m+. Questions? Drop us a line or give us a call at 512-577-6049.