A hard money loan is a helpful way for real estate investors to get quick funds. These are short term loans, usually lasting less than two years. They are typically not disclosed on a credit report, but you should still disclose them to other lenders when seeking a conventional loan.
Do Hard Money Lenders Report Loans to Credit Bureaus?
Most hard money lenders do not disclose hard money loans to the three main credit bureaus: Equifax, Experian, and Transunion. This is because they do not rely on the borrower’s credit report for loan approval. Instead, they use real estate investments as collateral, determining your ability to pay back the loan based on the value of your property.
While a hard money loan will not appear on your credit report, and your credit score is typically of little concern, the lender will perform a background check to ascertain whether you are at risk for defaulting on the loan.
Some lenders may also disclose it to the credit bureaus should they sense risk, as there’s no regulations keeping them from doing so. As such, you should assume that the loan may show up on your credit report and repay it on time.
Where Else Might Hard Money Loans Show Up?
Though hard money loans typically do not show up on your credit report, they still appear on other documentation, such as background and asset searches.
For example, if you seek out a second loan from a different hard money lender, they will run a background check and asset search to identify what other resources you have. If you have multiple short term loans, you may be denied.
Your repayment history, as well as your credit score, will also be scrutinized if you choose to refinance a hard money loan with another lender. Late payments may bar you from being able to refinance.
Conventional lenders perform a background check on a borrower in addition to reviewing their credit report before approval, so failure to repay your hard money loan can disqualify you from further funding in the future.
While DSCR loans are primarily interested in the property’s cash flow and do not require personal income verification like bank statements, the lender will still inquire into your credit history and run a background check.
This is why, in addition to running DSCR calculators to ascertain whether a property is profitable, you should also request your own credit report and pay for a background check so that you can contest any inaccurate information before it is disclosed to a lender.
Why Is It Important to Be Transparent About Hard Money Loans?
Though hard money loans are incredibly convenient, allowing a borrower to quickly finance essential real estate needs, they also come with risks, which is why it’s essential that you be transparent with your hard money lender.
Discuss why you need the loan and disclose any other financial obligations so that you avoid miscommunication, which may cause your lender to bring the loan due ahead of time.
As hard money lenders have more freedom in who they can approve for a loan, you must represent yourself as a trustworthy and responsible borrower to improve your chances of success.
Situations Where Hard Money Loans Make More Sense Than Traditional Financing
Though they are still bound by certain federal regulations, hard money lenders can make their own stipulations regarding what documentation they require. They also focus much of their decision-making process on the real estate in question rather than the borrower’s finances.
As such, a hard money loan can be useful for those whose debt to income ratio or credit score disqualifies them for other financing, whether that is for an investment or a primary residence.
Many real estate investors may turn to hard money loans when they need a construction loan or funds for a down payment, especially when they are flipping property using the BRRRR method, as the approval process is much faster and requires little documentation.
A hard money loan can be opened in just a few days as opposed to the weeks or months it takes to get other loans approved, making them a good option for those who need to quickly close on an investment property.
Homeowners may also use this when they urgently need renovations on their primary residence but aren’t able to take out a home equity loan or open a HELOC.
The Bottom Line
Hard money loans don’t typically show up on credit reports, but they can. Lenders for this type of loan have more discretion in who they approve, and they may report to credit bureaus should you fail to repay. They also appear on background checks, meaning that if you miss payments, you may have difficulty accessing other loans.
A hard money loan can be used as a construction loan or to quickly finance investments. They are not bound by conforming loan limits, meaning you may be able to borrow more than you could with other loan types.
It’s important to note that these loans typically have higher interest rates than other forms of financing because they have a much shorter term. You may also have to make a balloon payment at the end of the term if you have chosen an interest-only option, so it’s critical that you measure risk versus reward when pursuing this type of loan.