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Feb 26 2018
  • By wpengine

Will Using Hard Money Affect My Credit?

When you take out a personal loan, mortgage or auto loan, there is a chance that doing so could impact your credit score. Your score may go down when lenders check your credit, and your score may also rise or fall based on whether or not you make payments in a timely manner. However, your credit score likely won’t be impacted by taking out a hard money loan.

Hard Money Lenders May Not Run Credit Checks

For the most part, hard money loans are meant for those who don’t have good enough credit to qualify for traditional mortgages. In some cases, these loans may be made by private citizens from their own bank accounts or self-directed IRAs. Therefore, they may decide to loan based on other factors such as a borrower’s income or because they have a personal relationship with the applicant. 

Loans May Impact Your Debt-to-Income Ratio

Applying for a hard money loan may have an impact on your current debt-to-income (DTI) ratio. If your DTI is too high, it may make it harder to borrow money from traditional lenders. Assuming that your lender doesn’t report this loan to credit agencies, it may not show up in an initial review of any future loan request that you make. 

However, if a lender does ask about any other debts that you have, it may be necessary to disclose the hard money loan. One benefit of a lender not reporting a hard money loan is that an increase in your DTI may not lower your actual credit score while you repay it.

The Loan Is Secured By the Home Itself

Hard money loans are secured by the home itself, which means that the lender has a greater chance of getting his or her money back. Therefore, there may not be a need to check a person’s credit score prior to making a loan. If the borrower defaults, the lender simply takes possession of the property. In most cases, lenders that don’t run credit checks are unlikely to report payment information to credit agencies, which means that they won’t impact your credit score.

Hard Money Loans Tend To Be Bridge Loans

When a person takes a loan from a hard money lender, he or she generally has only a few weeks or months to repay it. In most cases, the intent of someone who borrows from such a lender is to use the money to pay carrying costs until a traditional mortgage can be negotiated with a mainstream lender. 

In some cases, the intent is to fix the home, sell it and repay the loan before the payment is due. In most cases, a lender won’t provide the money unless it is likely that these goals can be met before the loan comes due. The likelihood of a borrower getting a mortgage or selling the home may be done through a market analysis as opposed to a formal credit check. 

A Foreclosure May Harm Your Credit

If you don’t repay the loan in a timely manner, the lender may choose to foreclose on the property and assume ownership of it. This may be true even if you already have a mortgage or some other lien on the property. While it may be possible to delay a foreclosure by filing for Chapter 13 bankruptcy, the bankruptcy will also have an adverse impact on your credit. 

There is also no guarantee that the foreclosure proceedings won’t resume after the bankruptcy case ends. If you choose to file for Chapter 7 bankruptcy, it will stay on your credit report for 10 years. However, Chapter 7 generally doesn’t deal with personal debts that are secured such as hard money loans. This means that it may only be an option if you formed an LLC or some other separate entity to fund the flip or rehab project.

Those who need short-term funding to finance a home rehab or flip may be best served by working with a hard money lender. In some cases, there will be no direct impact to your credit by doing so. However, it is also possible that a lender will do a formal credit check or that not paying the loan could lead to bankruptcy or foreclosure. Ideally, investors will perform due diligence to fully assess the risk of taking such a loan before applying for one.

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