It’s probably fair to say that the average consumer doesn’t know much about the hard money industry. Consumers do not realize that hard money lenders are private lenders. They don’t know that these private lenders specialize in hard money and bridge loans for commercial purposes.
One of the more interesting things about hard money is how its commercial nature makes such an enormous difference in the way lenders do things. For example, you might have heard that private lenders do not normally run credit checks before approving loans. Hard money’s commercial nature is partly responsible.
The Clientele Is Different
Think about the customers a retail bank normally works with. They are consumers looking to purchase homes or cars. They are homeowners looking for money to complete remodeling projects. They are seniors who like to travel and parents who need to fund a college education for their kids.
All these types of needs are consumer needs. They are also needs that private lenders will not fund with hard money in bridge loans. Private lenders serve an entirely different clientele. Their customers are business owners, investors, landlords, etc.
Salt Lake City’s Actium Lending is a perfect example. Almost all of their loans go to real estate investors in Utah, Colorado, and Idaho. These are people looking for access to fast cash so that they can complete deals as quickly as possible. They cannot afford to wait on traditional financing.
No Reporting to Credit Agencies
A focus on commercial transactions discourages hard money lenders from reporting their loans to credit bureaus. They don’t rely on credit reports and scores to make approval decisions, so there really is no value in contributing by reporting their loans. That’s why hard money and bridge loans made by private lenders do not show up on credit reports.
As for why they don’t check credit reports, it is all in how approval decisions are made. Hard money lending is asset-based lending. That means loans are based on collateral a borrower offers to back the requested loan. Lenders are looking for enough value in that collateral to cover the amount borrowed plus any anticipated costs that might be encountered in the event of default.
What lenders are looking for cannot be quantified in a credit report. What matters is collateral value. A borrower’s credit score and history don’t mean much to loan approval.
Trust Deed Arrangements
Most hard money loans cover real estate transactions and needs associated with business expansion. The loans are not recorded as mortgages or small business loans. Instead, they are recorded as trust-deed transactions. This is only possible because the transactions themselves are commercial in nature.
In a trust deed arrangement, the deed on the property used as collateral is transferred to a third party who acts as a trustee. That third party holds the deed in trust until the loan is paid off. However, the trustee also agrees to transfer the deed to the lender should the borrower default. There is no long, drawn out court case. There are no foreclosure proceedings.
Hard Money Lending Is Still Regulated
All of this might give you the impression that hard money lending is a rogue industry through which unscrupulous lenders rip off their customers. Nothing could be further from the truth. Hard money lending is still regulated. Lenders are still licensed.
Hard money lenders do things differently because their focus is commercial. They lend for commercial rather than consumer needs. This makes a difference in everything from how loans are approved to how much attention lenders pay to credit scores and histories.