Underwriting is a normal part of the lending process. Whether a borrower is looking for a residential mortgage, an auto loan, or funds to start a new business, the lender will conduct a thorough underwriting process to determine his eligibility. Hard-money lenders also use an underwriting process. But they go beyond credit score to underwrite assets.

The Basics of Underwriting

Underwriting can mean different things depending on a given financial scenario. In the lending industry, it is the process of evaluating a borrower and his loan application to determine whether the loan should be approved.

How Conventional Lenders Underwrite

A traditional bank or credit union is bound by law to closely examine a borrower’s creditworthiness. As a result, underwriting forces the bank to examine:

• Income streams
• Credit score and history
• Current debt load
• And more

Within the scope of these three categories is a long list of documents a conventional lender will request. Banks want to see pay stubs, W2s, bank statements, and tax records. When dealing with a borrower whose income is non-traditional, they often want to see things like investment records and profit and loss statements.

In essence, banks are underwriting the borrower’s credit score supported by all the other factors they look at. But that’s not how hard money lenders work.

How Hard Money Lenders Underwrite

Actium Lending is a Utah hard money firm based in Salt Lake City. They say hard money underwriting is based on asset value. Along with the loan application, a borrower offers some sort of asset as collateral. The asset is almost always real estate.

The value of that asset is what matters to the lender. Underwriters do not care about the borrower’s income, credit score, debt load, etc. Their decision to approve or deny is based almost entirely on how much the collateral is worth. Therefore, hard money lenders are underwriting assets rather than credit scores.

How They Are Able to Do It

Conventional lenders cannot ignore the indicators of creditworthiness. So it’s understandable that consumers might wonder how hard money lenders can do it. It is a matter of state law.

Conventional lenders are licensed and regulated at the state level. But they are also subject to a variety of federal laws. Any lending institution that wants to provide residential mortgages must be licensed by the state, for example.

Hard money lenders are not licensed banks or credit unions. They are privately owned firms, groups of investors pooling their money, or high-net-worth individuals choosing to lend out their financial resources. Their activities are still regulated, but not as strictly as banks and credit unions.

The law allows hard money lenders more leeway and flexibility because the risks they face are exclusive to them. On the other hand, any risks a bank takes also impact all the bank’s depositors. That is why banks and credit unions need to be more careful.

Why It Matters to Borrowers

All of this matters to borrowers because hard money lenders can do things banks cannot. For example, Actium Lending can get from approval to closing in a matter of days. No bank can do that. To a real estate investor trying to close a deal, speed is everything. They would rather go with hard money than conventional financing.

In retail banking, it is all about credit scores. But assets are the name of the game in hard money. It’s no wonder real estate investors and businesses prefer hard money lending over its conventional counterpart. Conventional lending just isn’t well suited to certain types of commercial transactions.