Many real estate investors new to hard money loans ask, “Does a hard money loan appear on my credit report?” This question comes up several times each year from people concerned that a hard money loan will impact or jeopardize loans they need for other properties.
In this blog post, I’ll answer this question and provide insight into how lenders account for a hard money loan, with the following topics:
Most hard money lenders do not report the loan to a borrower’s personal credit report through the three credit bureaus - Equifax, Experian and Transunion. Hard money lenders primarily make business purpose loans versus consumer purpose loans, where the borrowing entity is a limited liability company (LLC) or corporation (INC), which usually have a personal guaranty as a layer of repayment protection.
In addition, hard money lenders are simply not set up to report to the three credit bureaus. Often, you’ll find that a hard money lender is a private individual who makes a few loans each year to real estate investors in their area, either directly with the borrower or through a hard money mortgage broker. This person isn't going to take the necessary steps to get approved with the bureaus, just to report four or five short-term loans onto the borrower’s credit report. (The agencies require a lot of paperwork, policies and procedures to be authorized as a reporting creditor).
Though hard money loans won’t appear on a credit report, they will appear on a background search, like we use at FCTD — as well as on asset searches that conventional and Non-QM lenders use when underwriting loans. On a few occasions over the years, a Non-QM lender has asked me about a hard money loan on a property that the borrower didn't disclose on their application. (The non-disclosures were omissions and not intentional.)
In a Non-QM rental property loan (a business purpose loan), the lender only factors in the cash flow of the property in what’s known as a Debt Service Coverage Ratio loan (DSCR). The lender simply uses the gross rental income minus the principal, interest, taxes and insurance (PITI) of the subject property to calculate the DSCR, or debt-to-income ratio. In this case, the presence of the hard money loan on an asset search will not impact the loan approval.
On a conventional loan for a primary residence (a consumer loan), the lender factors in the applicant's total mortgage, installment (auto and student loan), revolving (HELOCs and credit cards) and hard money loans. Even though this hard money-backed property doesn’t show up on the credit report, it will on the asset search and be counted against the borrower’s debt-to-income (DTI) ratio. Conventional lenders use this loan in their DTI calculations because most hard money loans have a personal guaranty, even if the loan was taken out under an LLC or corporation.
I had such a case in 2021, when a homebuilder contacted me to finance his new primary residence. His company had a $5 million construction loan for eight homes that he'd personally guaranteed. The lender I placed him with for his new primary residence required 12 months reserves for both his primary residence ($120,000) and for the construction loan (~$530,000) — on top of the $500,000 down payment on the new house. The loan didn’t go through because he didn't have the $650,000 reserves in the bank. His liquidity wouldn’t be high enough until the eight spec homes sold in the next four to five months.
If you’re applying for a conventional, jumbo or Non-QM loan (institutional lenders), you'll need to verify payments you made to any hard money loans secured by your properties — even though these don't appear on your credit report. Institutional lenders almost always require verification of mortgage payments (VOM) on all loans that appear on the asset search. Additionally, they'll require a payment history schedule from the hard money lender or loan servicer (like FCI Lender Services, Inc.), 12 months of bank statements showing automatic payments, or copies of twelve cancelled checks. Documentation is everything when moving from a hard money loan into an institutional loan.
Conclusion
Even though hard money loans won’t show up on your credit report, they will appear on a background and asset search. If you want to finance a property with an institutional business purpose loan, any hard money loan you have for that or any other property will appear on your asset search. Prepare to prove a twelve month on-time payment history on that hard money loan. Additionally, if you’re taking out an owner-occupied consumer loan, the institutional lender will require that you have sufficient liquidity to meet the reserve requirements if you personally guaranteed a hard money loan made to your LLC or corporation.
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Ted Spradlin