3 Reasons Your Hard Money Loan Will Be Denied

Compared to a traditional bank loan, hard money loans are fairly easy to obtain. The approval time for a hard money loan can be completed in one day and in many cases and the loans can be funded within a week if needed. Bank loan approval and funding can take up to 45 days or more. Hard money lenders can still provide funding if the borrower has issues such as low credit scores, no income history or recent foreclosures, loan modifications or short sales. These issues would prevent a tradition lender from offering funding. Hard money loans are much faster and easier to get, but borrowers need to know these 3 main reasons why hard money loan requests are denied.

1. Borrower lacks a sufficient down payment or enough equity in an existing property

A very common reason for a hard money loan request being denied is the borrower lacks a down payment to purchase the property, or they don’t have enough equity to borrow against in a property they already own. Some new real estate investors mistakenly assume they can get a hard money loan with 100% financing. Most hard money lenders want the borrower to have at least 25% equity invested in the deal.

Buying a property at a price below market value with does not count as built in equity and is not a substitute for a lack of down payment. Lenders want to see that the borrower has some of their own funds invested in the deal and has “skin in the game”.

2. Borrower lacks the ability to make monthly payments on the loan

Another important aspect a hard money lender will analyze is the borrower’s ability to make the agreed upon monthly loan payments. The best way for the borrower to prove this is show sufficient income to cover the monthly payments as well as having some funds in the bank. If the borrower doesn’t have much income or cash reserves this can be a red flag to the hard money lender. A borrower short on cash needs to partner up with someone who can prove reliable income.

3. Borrower lacks an exit strategy

Hard money loans for real estate are for short-term use. The most common loan terms are 1 to 3 years but longer terms can be acquired in special circumstances. Since hard money loans are short-term, the remaining balance on the loan will be due at the end of the term. A reasonable exit strategy is necessary in order to pay off this balance and the hard money lender will want to know the borrower’s plan upfront.

Common exit strategies include:

• Selling the property

• Selling another property the borrower owns to come up with the funds

• Refinancing with conventional loans

• Refinancing with a new hard money loan

It is not uncommon for borrowers to use a hard money loan when their current credit or other issues prevent them from qualifying for a traditional bank loan. The borrower can work to clear up issues over the course of a couple years and then qualify and refinance into a bank loan.

Original article from North Coast Financial: 3 Reasons Your Hard Money Loan Request Will Be Denied