Hard money loans are simpler to obtain than traditional bank loans. This is true because hard money lenders frequently overlook personal problems that would make it difficult for you to secure a standard loan. That does not imply, however, that all properties are accepted by hard money lenders. To get their desired loan accepted by their lender, a borrower and their project still need to fulfill a few crucial conditions.
It is important to understand the reasons for hard money loan rejection while deciding to start any project as it may seem easy and quick cash but a hard money lender can also reject the request. Here are 7 common reasons for hard money loan rejection.
List of the reasons for hard money loan rejection
1. Unfavorable Location
Location is a major part of fix and flip projects, the better the location the quicker it sells. Better price stability, higher renter interest, and ease of locating comparable properties all result from a desirable location. A good neighborhood serves a better value to the property in terms of fix and flip. And hard money loan is a short-term loan with higher interest, so the lender will make sure, your property location will sell quickly and you are able to pay back in a short duration. And if they find that particular location does not make an easy sell, there are higher chances that your loan request will get rejected
2. Lack of Equity in Current Property
You will require a greater down payment if there is insufficient equity in the property to allow you to borrow against it. The loan will be declined if you don’t make this financial commitment. This is why.
Hard money lenders simply want to assist with a portion of your buy; they do not want to fund the entire thing. Most lenders require at least 25% equity investment on your part in order to guarantee a smooth approval procedure. This demonstrates your commitment to the property.
3. Lack of Capital Availability
Not enough skin in the game is the number one reason a hard money lender will reject you. Make sure you have a sizable down payment to demonstrate your financial soundness if you’re buying. Lenders will want to see enough equity in an existing property if you’re seeking to sell it for a profit. We receive the following requests far too frequently:
- “Are you able to finance 100%?”
- Do you permit the seller to carry back the down payment?
If you are not investing money in the transaction, the lender is assumed to be bearing all of the risk. 100%-LTV is riskier, and you want to pitch your deal as a “low-risk” proposition. Most lenders need a down payment of at least 20–25% from the borrower. Financing at 100% LTV is an option, but only very rarely and in extremely specific circumstances. Make sure you have adequate cash or equity if you want to improve your chances of getting approved.
4. Loan-to-Value (LTV)
The fact that the client has no stake in the outcome is one of the key reasons a hard money loan will get rejected. If you lack at demonstrating your personal financial stability to your lender your personal financial stability. This is so that lenders don’t feel as though they are taking a risk by working with a borrower who can’t contribute their own money to a deal, and that leads to the rejection of lending hard money loans. Generally speaking, the majority of hard money lenders require an LTV of at least 70%.
5. You lack a clear repayment strategy for the loan.
Applications that provide an easy-to-understand exit strategy and a clear repayment plan are highly valued by lenders. Your plan must be reasonable and based on objective metrics, which is equally vital. Different escape strategies have different advantages. Hard money lenders prefer to see the following good, detailed, and efficient exit strategies:
- Based on nearby comparable sales and my previous three successfully completed projects in that neighborhood, I expect to sell the home in 9 months for $525,000.
- Refinancing the loan within two years of the due date. Purchasing commercial property in stage 1 and clearing the title of all liens. Rehab stage two, light. Lease restructuring occurs in Stage 3. Refinance at stage 4 with a conventional lender.
Here are other less ideal escape plans:
- “I’ll sell the house in three months for $195,000; only minor work is needed.”
- “The debt will be readily repaid by my new business.”
There are a few problems with the first example. First of all, there is no benchmark for the sale price. Based on comparable sales, is this a realistic estimate or is it overly optimistic? Second, a turnaround time of 3 months is really swift. Most renovations take longer than expected to complete, especially when you account for contractor surprises.
6. You are unable to afford the monthly payments.
If the loan is authorized, the lender will look at your earning potential to see whether you can afford the monthly instalments. The rental income will be considered if you are purchasing an income property. Bank statements or tax returns can serve as your proof if you are preparing to fix and flip a property (or income from another property).
Some lenders will ask you to put an interest reserve in order to mitigate a risky borrower profile in order to make sure you can make the payments. In order to draw mortgage payments automatically, the lender will want you to deposit many months’ worth of interest payments in a collateral account. Lenders occasionally demand upfront interest payments of six months (which typically comes off the top). This relates to the first argument since loans with a high loan to value ratio will provide less profit, which is precisely why they are challenging to execute.
7. Not having clear exit strategy
Hard money lenders appreciate clear exit strategies that outline a direct course for repayment. This is crucial since hard money funds typically have a short duration of 6 to 24 months.
- Selling – you might reiterate the significance of demand and population while selling.
- Refinance to hold – Obtain a traditional loan with a lower rate of interest by performing a traditional refinance, then rent the house. The equity in the house is one element to take into account
- Subdividing to own free and clear – This one is extremely specialized and rate, but if the buyer buys a property with a double lot that is sub dividable, the creditor can subdivide, either fix or sell the property as is, pay off the loan, and then acquire the other lot free and clear. They have a lot of equity now, which they may use to grow and develop or simply sell for a full profit.
Are you prepared to submit a loan application? Hard money loans are simpler to get than standard home loans from your neighborhood bank. Ensure the investment property has adequate equity and you are able to afford the monthly mortgage payments before applying for one of these loans, though. When they build a relationship with their lender, many investors discover that obtaining future loans is considerably simpler.
For you to keep expanding, 14th Street Capital combines simplicity, flexibility, and possibilities into one simple process. Our experienced team is available to help whenever you need hassle-free hard money loans to start your project.