Credit Scores: Hard to live with them, but can’t live without them. In the lending world, the credit score of a borrower may either allow them to get loan approval or prevent them from getting approval.

What Exactly Are “Credit Scores”? 

There are 3 main providers of credit reports known as credit bureaus. Each of them uses similar but not identical methods to create a “credit score” for the borrower. To get a credit report, a lender must be registered with the credit reporting bureaus.

Credit reports are not free. A 3-bureau full credit report now costs around $120. Lenders typically charge this fee to their borrowers.

The ranges of credit scores are:

• Scores from 300–579 are rated poor
• Scores from 580 to 669 are rated fair
• Scores from 670 to 739 are rated good
• Scores from 740 to 799 are rated very good
• Scores from 800 to 850 are given an exceptional rating

Again, each credit bureau has its own method of assigning a credit score, and their ratings for an individual will vary from rating company to rating company, but each bureau’s score typically falls within a very limited range of variation.

How Lenders Check Credit

One of the factors credit bureaus use to set scores is how many requests for an individual’s credit score are received in a specific period. Each “credit pull” lowers an individual’s score, but not by much—sometimes just by one or two points. It is a common misconception to think that a credit pull will have a serious negative impact on a person’s credit score.

In a full credit report, the report not only shows the individual’s credit score but also shows if there are lawsuits pending against the individual and if there has been a bankruptcy filing within the past few years. These other bits of information are quite important to a lender’s underwriting of an individual for a loan. It is possible to get what is called a “soft pull” that doesn’t lower a credit score, but that soft pull also doesn’t show information on lawsuits or bankruptcy. The soft pull just has one credit score, not three.

Banks, life companies, and private money (hard money) lenders are the most typical sources for real-estate-secured acquisition and refinance loans. Banks assign a much greater importance to an individual’s credit score than do private hard money lenders. Banks are frequently called “credit- and cash-flow-based lenders.” Private hard money lenders are typically called “asset-based lenders.” Life companies are somewhat in between. Life companies lend a lower “loan-to-value” amount than banks but a higher loan-to-value amount than hard money lenders.

Credit Score Requirements for Hard Money Loans

Montegra is a Denver-based hard money lender with a 54-year history of funding bridge loans. Bridge loans are designed to get a borrower from Point A to Point B—from initial acquisition and lease-up to being more fully leased and able to qualify for a bank or life company loan.

At Montegra, we always look at a loan applicant’s credit score, but it is not the most important underwriting tool. Our primary criterion for making a loan is to lend no more than 65% of the property’s appraised value. Banks will often lend up to 80% loan-to-value (LTV), and life companies will lend up to 70–75% LTV.

If a loan applicant has a history of lawsuits, this will count against them at Montegra. If the individual has filed bankruptcy in the past 5–6 years, we will still consider making them a loan, but typically, a bank or life company will not lend to them. If an individual shows a credit score in the 500s or low 600s, we will be somewhat reluctant to fund them a loan, but will still consider all their other financial factors, while banks and life companies will probably reject them out of hand. Our experience with borrowers who have a credit score in the 500s has not been a good one, but we still consider their application.

When Credit Score Matters (and When They Don’t)

Having a high credit score doesn’t guarantee a borrower a bank loan, but it helps. It also helps a borrower get a hard money loan from Montegra, but it is not essential. If a borrower has at least a fair credit score or higher, we are more open-minded about doing a loan; however, even with a high credit score, we still do not lend over 65% LTV, adhering to our asset-based lending philosophy.

Credit does play a role in our underwriting, but it is not the determining factor in whether a borrower can get a hard money loan from Montegra or other hard money lenders. A higher credit score may help a borrower secure more favorable loan terms because it shows a consistent repayment history and fewer past financial issues. On the other hand, certain credit issues, such as recent lawsuits or a bankruptcy filing within the past 5–6 years, will count against an applicant and may make the loan more difficult to approve.

However, a less-than-perfect credit score does not automatically disqualify a borrower. Hard money lending is asset-based, and the strength of the collateral and the loan-to-value ratio have far more impact on the approval decision than the credit score alone. If the property has solid value and the loan request is within our 65% LTV limit, we can often move forward even if the borrower’s credit is in the fair or lower ranges. In short, credit matters, but it does not outweigh the quality of the real estate or the overall structure of the loan.

Getting Approved for a Hard Money Loan

If you are looking for a first deed-of-trust asset-based real estate loan on a property in Colorado, call Bob or Kim at 303-377-4181, apply online, or email us at Bob@montegra.com or Kim@montegra.com. If you can include in your email the following information, your loan application will move forward more quickly

•  property address,
• your estimate of the property’s current fair market value,
• purpose of the loan (acquisition or refinance),
• loan amount requested,
• loan term requested,
• and a current personal financial statement.

Montegra never takes more than 30 days to underwrite and close a loan and can close much more quickly—in as little as one week if the borrower has the necessary information.