If you have bad credit or no credit, how will that look to hard money lenders in NY? Will you have difficulty buying that investment property or the commercial apartment building or warehouse that caught your eye? Your credit rating is important to traditional lenders but how much of a role does it play with hard money?
Credit and Traditional Commercial Financing
Like other types of financing it is essential to have a good credit rating if you expect to move forward with your business venture. Not only do you need good credit to get the first loan, but also if you expect to add additional funds at a later date you will need to maintain a good credit rating. While some lenders may lend money solely on their personal experiences with you and your company, there are many that will only work with borrowers who have generally good credit. They become a little antsy in today’s market and fear that even though you may be paying them well now, if your credit report shows you are late paying other lenders they fear you may be on the verge of becoming a serious credit risk.
Credit Ratings and Hard Money Loans
Unlike traditional loans, hard money loans do not require good credit. What is the difference? New Jersey hard money lenders are interested solely in the value of the property. In the case of a depressed property the hard money lenders will base their decision on what they perceive to be the future potential of a particular property. In other words, they want to now what the property will be worth after all the repairs and renovations are complete. This is important to hard money lenders since they rely on being able to claim the property in the event the borrower is unwilling or unable to repay the loan.
Why the Difference Exists
Why don’t traditional lenders use the same formula that hard money lenders do? Why are they so concerned about credit instead of just the value of the property? One of the main reasons for this difference is the LTV (loan to value) difference between traditional and hard money lenders. The ratio is much lower for hard money lenders who typically only finance 60-70% of the property’s market value compared to traditional lenders. On the other hand hard money lenders also use a LTV ratio for depressed properties that is based on the property’s future market value.
Traditional lenders are clearly not interested in having to reclaim property thus the reason they place some much weigh on credit. New Jersey hard money lenders are interested in the value of the property and have no problem thinking in terms of reclaiming the property if the need arises. This is likely to be because their experience shows them good project owners are not likely to default or because these are short-term loans on which the default ratio is much lower than traditional mortgages. Whatever the reason may be, those who are unable to obtain financing elsewhere can obtain a hard money loan as long as they can find an investor interested in their venture.