So much of what goes into hard money lending is misunderstood by the general public. This is partly due to a plethora of misinformation found online. But it is also partly due to the fact that the average consumer will never have a need to apply for a hard money loan. Ask the average person on the street whether hard money loans show up on credit reports and you are likely to get a variety of answers.
The credit report question is just one of many most consumers do not have answers to. Let’s delve into it a little bit more deeply. Knowing and understanding the answer could help you better understand hard money in general.
What Hard Money Actually Is
The starting point is a definition of hard money itself. Hard money is a form of financing offered by private lenders. These are either individuals or licensed financial services companies that lend for specific types of projects. Take Actium Partners based in Salt Lake City. As a licensed hard money lender, Actium provides real estate loans in Utah, Idaho, and Colorado.
Because hard money lenders are private lenders, they aren’t subject to the same rules and regulations that govern traditional financial institutions. They are still regulated to some degree, though. The only exception is the individual who chooses to make informal loans to friends, acquaintances, and family members.
Hard Money Loans and Credit Reports
A basic definition of hard money leads us to the central question of whether hard money loans show up on credit reports. In a word, no. Lenders do not report their loans to any of the three major credit reporting agencies. There are two reasons for this:
- Business Loans – Hard money loans are considered business loans rather than consumer products. The loans are typically made to limited liability companies (LLCs) or corporations with a personal guaranty for additional security.
- Lender Status – As private lenders, hard money lenders have a different legal status. It’s often not worth their time and effort to be approved by credit reporting agencies or set their systems up to interact with reporting agency systems.
There is no practical purpose for reporting hard money loans to credit reporting agencies anyway. The vast majority of hard money borrowers are real estate investors. A smaller number of hard money loans go to businesses looking to fund expansion or capital improvements. In both cases, credit reports never enter into the equation.
Not Completely Hidden
Despite hard money loans not being reported to credit agencies, investors shouldn’t make the mistake of assuming their outstanding loans are completely hidden. They are not. Most hard money loans will show up in asset and background searches used by lenders to determine a borrower’s cash position.
For example, consider a developer with several outstanding hard money loans looking for a construction loan from a bank. He hopes to use that money to put up a new office building on one of the properties he’s developing. During a typical asset and background search, the bank will discover the outstanding hard money loans.
If further investigation reveals that the loans put the developer in a precarious cash position, it’s likely a bank loan will not be approved. The developer will have to finish his current projects and pay off those loans before proceeding with the construction project.
There is a lot about hard money lending consumers don’t understand. But at least now you know that hard money loans don’t show up on credit reports. Lenders don’t report them because they have no need to.