Good Credit? No Guarantee: How Hard Money Steps In When Banks Step Back
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May 17, 2024

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Many borrowers believe a good credit score is a golden ticket to mortgage approval for traditional lending institutions like banks.

While a good credit score is a critical factor in bank approval, it’s far from the only one—especially in 2024.

Today’s complex lending landscape considers the applicant’s income, employment, debts, assets, etc. 

In this article, we’ll explore the alternative option for borrowers struggling to meet a bank’s strict approval requirements: hard money lending.

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Is good credit enough to secure a mortgage in 2024?

Getting a mortgage from a bank, credit union, or other traditional institution involves a thorough evaluation of the applicant’s financial life.

A credit score is a crucial part of this evaluation but is essentially the starting point.

A high credit score indicates to lenders that the borrower has a history of paying their debts on time. However, it does not provide the total financial picture that traditional lenders need.

Common reasons that a borrower may get denied despite a good credit score include:

  • Irregular income
  • High amount of debt
  • Property use (investment properties)
  • Insufficient down payment or asset reserves

A borrower could get pre-qualified for a mortgage at a bank with a strong credit score and glance at their finances, but once the lender digs into the details, they deny the application for one of the above reasons.

How do banks assess mortgage applications?

Mortgage loan approval is based on analyzing the borrower’s ability to repay.

Banks will assess a mortgage applicant based on the following factors:

  • Credit history: Beyond the credit score, lenders will take into account the length of credit history and the diversity of the accounts. Lenders will also look at there historical late payments to see if there is or has been a history of not paying.
  • Income stability: Measured both by the amount of income and its consistency over time
  • Employment type and history: Applicants who are self-employed, work part-time, or are contract workers are scrutinized more heavily because they may be viewed as having less predictable income
  • Debt-to-income (DTI) ratio: Even applicants with high, steady income may be denied if they have a lot of debt relative to their income
  • Down payment size: An insufficient down payment means the lender is carrying most of the loan burden, which makes it a higher risk
  • Savings and assets: Lack of savings also makes the borrower a higher risk to lenders because it would act as a buffer in times of financial strain. Lenders like to make sure that in the event a borrower’s monthly income is not enough to cover the payment of the loan, that there is enough reserves to cover the cost of the payment. 
  • Property type and usage: The type of property and its intended use affects its valuation and how the bank views the loan’s risk
  • Market conditions: Economic factors and real estate market trends can influence lending decisions

Good credit is just one aspect of mortgage approval—any of these factors can lead to a bank denying the applicant.

The basics of hard money lending

If a borrower has a good credit score but is self-employed with inconsistent income, they may be denied a mortgage from a bank—even if they can prove they have enough income to make their monthly payments.

What other options do borrowers have?

Hard money lenders can fill the gap left by traditional institutions because they are more concerned with the property’s value and potential than the borrower’s financial situation.

Hard money loans are secured by real property so lenders can make decisions more quickly based on years of industry experience rather than strict requirements.

Primary criteria for hard money loan evaluation

Hard money lender requirements differ significantly from banks.

While each hard money lender will approach the process differently because they can set their own requirements, they generally will evaluate the following:

  • Current property value
  • After-repair value (for fix-and-flip projects)
  • Equity in the property
  • Property’s investment potential
  • Borrower’s exit strategy or plan for repaying the loan

By focusing on the asset used as collateral and its investment potential vs. the borrower’s creditworthiness, hard money lenders provide an alternative route for people who cannot qualify for traditional financing.

They are vital for real estate investors who need quick, flexible funding for an investment opportunity.

Benefits of hard money vs. traditional bank mortgages

The major advantages of hard money loans include:

  • Rapid approval and funding
  • Often closing and funding within a 2–4-week period
  • Flexible terms that are tailored to the specific needs of the borrower/project
  • More concerned with the value of the property being used as collateral vs. the borrower’s credit
  • Specialize in loans used for major repair or renovation projects
  • Well-suited for short-term real estate investments
  • Straightforward application process
  • Potential for no repayment penalties
  • Access to funding for non-owner-occupied properties
  • Marquee Funding Group is one of the few hard money lenders who does loans for Owner-Occupied properties.
  • Bridge financing options

Traditional mortgages can take several weeks or months to process, and banks are hesitant to finance properties that require extensive repairs or renovations.

This minimizes the options available for real estate investors or alternative borrowers like self-employed individuals or freelancers.

Examples of hard money use

Hard money loans are well-suited for the following borrowing scenarios:

  • Renovating distressed properties: Hard money lenders focus on the ARV rather than its current state, which allows them to provide funding based on the property’s future potential
  • Purchasing auction properties: Auctions require quick decision-making and fast financing, which hard money lenders can rapidly arrange
  • Funding construction projects: Hard money lenders will finance these complex and costly projects based on the projected value of the completed property
  • Bridge financing: Borrowers can secure immediate funding to purchase a new property while waiting for a current property to sell
  • Land development: Hard money lenders can approve loans based on the value of the land and the development plan

They can also help borrowers who simply don’t fit the profile for traditional lending, such as business owners, self-employed people, or families who need to move quickly before they can sell their current home.

Traditional lenders often are unable or unwilling to finance these projects because they are considered too risky and complicated.

Meanwhile, hard money lenders specialize in these complex projects and are trained to structure mortgage options for unique business and owner-occupied scenarios.

Get started with Marquee Funding Group

Not all hard money lenders are created equally.

Marquee Funding Group is an experienced team of savvy real estate investors and loan originators.

Our team can rapidly identify your needs and execute solutions based on years of industry experience.

Submit your loan scenario today or call us at (818) 222-5222 to experience our quick, personalized service.

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