Hard money loans are usually simple to obtain, which is why they are a popular choice for real estate investors. Compared to traditional bank loans, hard money lenders look past details like credit scores and income history. They are more invested in the value of the property. However, there are situations when requests for a hard money loan are denied.
Let’s review three reasons why lenders will decline your application for a hard money loan. By being informed, you can prevent these things from interfering with your transaction.
- Not Enough Equity in the Current Property
If you don’t have enough equity to borrow against the property, you will need a larger down payment. Without this financial investment on your end, the loan will be denied. Here’s why.
Hard money lenders do not want to finance your total purchase – they only want to help with some. To ensure a smooth approval process, most lenders want to see at least 25% equity invested on your end. This shows that you are serious about the property.
- Not Having an Exit Strategy
An exit strategy is important for private money lenders. Because hard money loans are short-term – usually 1-3 years – a significant balance will be due at the end. To prevent you from walking away, lenders ask for an exit strategy upfront.
The most common exit strategies include:
- Selling the current property
- Selling a different property you own
- Refinancing with a new hard money loan
- Refinancing with a conventional loan
- Unable to Make the Monthly Payments
Hard money lenders are more flexible when it comes to income history, credit scores and past short sales/foreclosures. That said, they need to see that you will be able to afford the monthly payments. If you don’t have enough money, it’s a major red flag that you will not pay back the loan. Your request will then be denied.
To prevent this from happening, you must prove that you have the income to make the payments. If you don’t, you should have significant cash reserves to fall back on. If you are short on cash, consider partnering up with someone who is more financially stable.
Hard money lenders are easier to work with compared to traditional banks, so you have a good chance of having your request approved. The key is having equity in the home and the ability to make the monthly payments. As you establish good working relationships with lenders, future deals will be even easier.