5 Reasons you are Getting Rejected by Hard Money Lenders
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#1 - Not Enough Cash
The #1 reason you will be rejected by a hard money lender – not enough skin in the game. If you are buying, you need to make sure you have enough down payment to show financial strength. If you are trying to cash out from an existing property, lender will want to see enough equity to justify your request. Too many times we get the following requests:
- “Can you do 100% Financing?”
- “Do you allow the down payment to be a seller carry-back?”
If you are not putting your dollars into the deal, it means the lender is taking all the risk. You want to market your deal as a ‘low-risk’ opportunity, and 100%-LTV is riskier. Most lenders want to see at least 20-25% down payment from the burrower. 100% LTV financing is possible, but only in very certain cases, and very rarely. If you want to increase your chances for approval – make sure to have enough cash/equity.
#2 - You Don't Have a Clear Plan to Pay Back the Loan
Lenders love to see applications with clear, easy to understand exit strategy that paints a clear path to loan repayment. Just as important – your plan has to be realistic and based on objective metric. Not all exit strategies are created equal. Here are good, specific, and effective exit strategies hard money lenders love to see:
- “I plan to sell the property in 9 months for $525,000, based on comparable sales in the area, and my last 3 completed projects in that neighborhood”
- “Loan repayment within 2 years via refinance. Stage 1 acquisition of commercial property + removing all liens from title. Stage 2 light rehab. Stage 3 restructure current tenants’ leases. Stage 4 refinance with a traditional lender.”
- “I will sell the property for $195,000 in 3 months, light rehab is required.”
- “My new business will easily pay the loan”
The first example has a couple of issues. First, there is no point of reference to the sale price. Is it a realistic number, or too optimistic based on comparable sales? Second, 3 months is a very quick turnaround time. Most rehabs require additional time to complete, especially if you take into account contractor surprises.
#3 - You Don't have your Paperwork Ready
Even when hard money loans require far less documents and hassel compared to a bank – you still need to fill out some applications. And since the underwriting is asset-based, you still need essential documents that verify the property. Here are some of the requests from lenders:
- Purchase and sale agreement
- Rent roll and a copy of the leases
- Recent pictures of the property
- A copy of a recent appraisal
- Credit report
Note that some lenders have a ‘no-doc’ process, which requires no income verification, no tax returns, and no bank statements. Even then, some documents are are still required to get approved (at a very minimum, a title report, and entity formation docs). Having the necessary paperwork to process your loan shows you are serious and prepared. This is especially important for first time buyers.
Traditional loans can take several months to close. We can do it in a few days
Rates start from 8% with low cost to close. If we can find you a hard money loan you pay nothing
Up to 80% LTV
Access the maximum equity in your asset and unleash your investment portential
#4 - The Property is in a Bad Location
The three golden rules of real estate – location, location, location. A good location means better price stability, more renter interest, and it is easier to find comps to measure its value. A lot of applicants call us and ask about purchasing a property to rehab in a rural location, in cities with less than 25,000 residents or located in very remote areas. It is possible to fund deals in secondary markets and rural America. But most lenders are located in major metro areas (population larger than 100,000) and many only consider properties in those cities. This is especially true during a recession.
If you are a first-timer, consider this point especially important. More lenders to choose from means better rates, and lower costs.
#5 - You Can't Make the Monthly Payments
Lenders will analyze your earning capacity to see if you can pay the monthly payments if the loan gets approved. If you are buying an income property – the profits from the rents will be taken into account. If you are planning a fix and flip – bank statements or tax returns can be your verification (or income from another property).
To ensure you can make the payments, some lenders will ask you to place an interest reserve to mitigate a risky burrower profile. In an interest reserve, lender will ask you to place several months worth of interest payment in a collateral account so they can draw mortgage payments automatically. In some cases, lenders even ask for 6 months of interest payments up front (which typically comes off the top). This point goes to the first point – a high loan to value ratio will leave less profit and this is exactly why those loans are hard to execute.