This is what people ask me all the time: Is there any such thing as an asset based lender anymore? These days, most hard money lenders are asking for a credit report and other documentation from borrowers to give them a loan. For example, a borrower buys a wholesale property and is looking for a hard money loan. Fair market value for the property is $450K and the borrower is buying it wholesale for $180K. If a hard money lender is only giving him 65% of the purchase price, why would the lender need to see the borrower’s credit report??!! On a low LTV loan like this, this is truly an asset based, hard money loan. Why would credit be an issue? I think hard money lenders are just getting too picky and I wonder myself, ‘Is there any such thing as a true asset based lender anymore?’ Can anyone help answer this question?

Why Are Hard Money Lenders Asking for Credit Reports?

Lexington, KY · Member since 2009 · 2k+ posts · 1k+ votes

14y

If I am lending money I am going to require whatever will satisfy me enough to lend money. In the past several years lenders were burnt as prices fell and the asset they based their lending on became worth much less in a short period of time...thus, they are requiring a larger safety net (in the form of credit checks). Essentially, we are still feeling the effects of the shock to the economy and housing market, and probably will for some time.

As the economy recovers and the real estate markets rebound, lending will loosen and lenders will likely require less. Plus, who is to say they are being too picky…it is their money.

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Jon Klaus

Developer · Garland, TX · Member since 2008 · 8k+ posts · 4k+ votes

14y

Look at it from their perspective. They really want the loan to be paid back according to terms and not take back the collateral. So no, if they want to see decent credit, they are not strictly an asset-based lender. And in the example you give they might be suspicious about the FMV. Wouldn't you be if someone wanted you to lend on a deal like that?

As a solution, you can partner with someone with good credit. I know, not what you wanted to hear, but lending is far more conservative today than several years ago, even hard money lending.

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Jon Holdman

Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes

14y

If a deal like this actually existed, and the borrower only wanted $180K, then, yes, this might be a reasonable purely asset based loan. In reality, this property probably needs a TON of work and the borrower is wanting something more like $300K. The borrower is definitely going to need to prove they're credit worthy, that they have enough cash to pay for big chunks of the work before getting reimbursed, that they're experienced with a big rehab like this. And they're going to pay for my appraiser to evaluate the project. And it better be straight forward with plenty of good, recent comps.

Lots of projects and borrowers, not so much money. That's why they're picky. They can be.

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Joel OwensBusiness Member

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Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes

14y

I can tell you WHY.

I have had this conversation with other hard money lenders in my area.

When the market was hot years ago rehabbers new and old could make multiple mistakes and still make a profit and a buyers could fog a mirror and get a loan.

When the market started changing you could now do flips but if you made just one mistake on a rehab you might break even and a few mistakes you would lose your shirt on a rehab.

In some states the foreclosures process is long and costs are high to a lender.

HML's were not checking credit before or it was at 580 score.Now HML's are telling me they want people with good credit and high scores.

WHY??

2 reasons:

1.Many HML's are not using their money but other people's money.So the HML makes money off of initial app fees and points and the interest rate spread is paid to their investors who loan them the money.So the more times they can churn the money the more times they make points and loan app fees.

2.The credit score is real important.The HML's tell me if someone rehabs a house to sell for a flip and it doesn't sell.The HML lender doe snot want to foreclose and own the property.The HML wants to make sure the investor they have financed can refi into a conventional loan and pay the HML off.

This is where credit score and income etc. comes into play.

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OP

Lender · Salt Lake City, UT · Member since 2012 · 714 posts · 169 votes

14y

I think its about each individual deal.

Credit shouldn't matter for the right deal if a lender is truly an asset based lender. A lot of hard money lenders can't think outside the box, meaning they can't lend outside of their requirements or lending parameters. For example, some hard money lenders I know always go off purchase price and will never deviate from that. In contrast, other lenders I know are creative and are true asset based lenders that are willing to look at the true value of a property for the purpose of lending.

At the end of the day, credit can be a 'smoke screen' and won't really mitigate your risk too much in todays market. If the wheels fall off the cart and a borrower defaults, credit means nothing, whether its a bank loan or a hard money loan. This has already been proved in recent years with so many bank foreclosures on borrowers who had stellar credit. Credit means nothing, its about the individual deal and if it makes sense.

Thanks for the amazing feedback on this topic!

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Edgar B.

Residential Real Estate Broker · la mirada, CA · Member since 2011 · 66 posts · 12 votes

14y

On the numbers you gave the deal can be done, but the HML wants to know from credit file if you have anything following you, child support, tax liens, judgements as these will attach to the PIQ, even if you buy with entity if something goes south they want you to refi & cash them out.

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Curt DavisBusiness Member

Flipper/Rehabber · Memphis, TN · Member since 2008 · 5k+ posts · 2k+ votes

14y

Well, like everyone has stated each lender requires different wants. Some require pre appraisals to make sure they are not lending at full market values. What is really happening here is that your dealing with savvy HML's and the lazy days are over. If you dont want their money you can always find someone else to lend to you. If you have never lent money before you would not understand their needs.

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Will BarnardPro Member

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Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes

14y

Credit scores is a look into the probability of a borrower paying you back. The lower the score, the more likely the borrwer could default.

So why do HML's ask for your credit report? To give them one more piece of due diligence into confirming if you can pay the loan back. Now, in a situation like you posted, such a deal with that much spread could easily be funded with even a bad credit score.

The other thing is this: If you are a new customer to the HML, they will want to look deeper into you. if you have already done deals with them, they will just look at the deal and fund based on that. Its that simple.

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Eric M.

Flipper/Rehabber · Louisville, KY · Member since 2008 · 1k+ posts · 1k+ votes

14y

Credit does matter...even in asset based lending. Like Will said, it is one more piece of info.

The big issue that has changed is the FC process. It is not like it used to be when a lender could be assured that in several months he will get the property back in reasonable shape if the loan goes south.
Now it takes 2 years or more if the borrower fights it and the property will be trashed.
There is also a tremendous amount of fraud.

The credit score is not what they are basing their loan decisions on but HML's are just trying to get a handle on who their borrowers are.

We have learned that if a borrower is insisting on not showing their credit, there is most likely a big problem.

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Ann Bellamy

Lender · Tyngsboro, MA · Member since 2009 · 3k+ posts · 2k+ votes

14y

It's about knowing who your borrower is - IRS liens, previous foreclosures, etc. If a borrower walks from a mortgage and lets it go to foreclosure, he'll do it again. Lenders don't want the property, they want their money back.

I once had a borrower tell me that he had a multi-family that he still owned after bankruptcy. The mortgage had been discharged in the bankruptcy, but the lender had not completed the foreclosure. So the borrower continued to collect the rents without paying the mortgage. He very self-righteously explained that he had an obligation to his tenants to collect the rents to maintain the property. Evidently he didn't feel the same obligation to the mortgage company. No one wants to be in that position as a lender.

He was a prospective borrower, but didn't become our borrower.

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Brian Wall

Wholesaler · Santa Fe Springs, CA · Member since 2009 · 219 posts · 83 votes

14y

in addition to what everyone else is saying regarding tax liens, judgement liens, etc. There is one more reason.

A HML told me that since he is now licensed as a lenderd there are certain things he has to do to stay in compliance. One of those things is to have the applicant fill out a standard loan app, and the other is to obtain a credit report.

Brian

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Will BarnardPro Member

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Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes

14y

Great point Brian!

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C Rich

chitown, MD · Member since 2012 · 38 posts · 1 vote

14y

@Corey -

One reason for this could also be that they need to slow down as their money dries up. Since the banks stopped investor lending (or at least slowed it down), the HML lenders are booming.

When I was looking for a loan to purchase investment property, 99% of the advice was to seek HML -- and that came from the bank personnel and the real estate agents!

I didn't like the terms of HML, so looked at local banks and found that there are still some that provide investor loans for r.e. They look at the entire deal and they also pull credit, verify tax returns, yada yada. No biggie since the credit is not what determines whether the deal makes sense.

The reason I rejected dealing with HMLs is for the very same reason the posters above stated that the HML needs to pull your credit -- knowing who you're dealing with.

I found that a lot of the HMLs attitudes and responses left me uneasy as their questions went outside the typical questions related to a borrowers ability to repay and began delving into too many specifics about the properties I was finding. Those questions should have come much, much later. I didn't trust them with that info. After trust had been called into question, I looked elsewhere for money.

Basically, the HMLs got so nosey in their initial contact interviews/questionnaires I actually thought that the HML guys may have a side business of collecting info to feed to their "preferred" contacts about the good deals I had found which would result in them competing against me and not paying me for finding.

Went with a local bank who couldn't give a chit about selling or giving away the info to secure new "relationships" and care only about making money for the bank -- which is already capitalized and regulated.

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C Rich

chitown, MD · Member since 2012 · 38 posts · 1 vote

14y

Nobody else hit with the nosiest of the nosey HML lenders that might be selling your deal data on the side? Hmm

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Ryan Pyle

Multifamily Investor · Toledo, OH · Member since 2008 · 296 posts · 308 votes

14y

I'm a pretty big customer to a Columbus based HML. They have never tried to send me other peoples' deals on the sly. That would be pretty slimy. I'm pretty sure they know that if they tried to send me someone else's deal, I would never work with them again because I wouldn't trust them with my deals.

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Will BarnardPro Member

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Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes

14y

In addition to Ryan's response, I would add that if you have your deal locked up (which you should before asking for the HML) then they can not steal it from you and send it to another investor unless you were to back out, in which case, it is fair game for anyone at that time. I don't see the risk in it unless you are giving property info on deals that are not yet contracted (which you should not be doing anyways)

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C Rich

chitown, MD · Member since 2012 · 38 posts · 1 vote

14y

Well, Will -

I can't say it is fair game. The only time I ended up having to contact HMLs was when an HML presented their company as a legitimate lender and then changed the terms of the deal. I was then put in a position to look at other HMLs' deals to compare the HML to other HMLs to understand the HML beast and get the best deal for myself.

What I noticed in that process is that HMLs asked too many questions about the property instead of about my financial capabilities. To counter their nosiness and give myself a level of comfort in divulging deal specifics during this comparison phase, I simply gave then info on nearby properties or properties with like comps.

My point is, there is no reason to give unproven, untrusted people too much info. Consumers don't know who they are dealing with when dealing with HMLs, but they KNOW that banks are regulated.

Like I've said previously, I went with a small local bank that had better terms for me with less risk to me of divulging my deals.

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C Rich

chitown, MD · Member since 2012 · 38 posts · 1 vote

14y

@Will and @Ryan -

There is nothing preventing HMLs from changing the terms of the deal after deal info and personal data collection has been divulged.

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Wholesaler · Chandler, AZ · Member since 2012 · 15 posts · 7 votes

14y

Corey Dutton - Sounds like you are either dealing with a "Soft Money" lender, or the HML is simply pulling credit for the first deal you do with them, but not actually using it for anything except to get a read on you.

I have borrowed millions and millions of dollars from HML's here in AZ and I have had to sign personal guarantee's (which I am fine doing because I "own my market" and know what values are). Even though times have changes since the housing crisis began, HML's can still be a fix-n-flip investors best friend!

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OP

Lender · Salt Lake City, UT · Member since 2012 · 714 posts · 169 votes

14y

This is what most of my clients complaint about, 'why do you need my credit report when you're charging me 12% interest?'

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Matthew Fisher

Investor · Houston, TX · Member since 2012 · 8 posts · 5 votes

14y

Lots of details in these answers. Simply put:
Your main or backup stategy to get out of the high interest HML is to refinance with conventional financing. Getting conventional financing relys on good credit. Hence the HM lender wants to see good credit.

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Why Are Hard Money Lenders Asking for Credit Reports?

Why Are Hard Money Lenders Asking for Credit Reports?

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