Income Artist

Top 3 Reasons A Hard Money Lender Will Decline An Application

Author: Jimmy Barron
Published:February 12, 2023
4 mins 17 secs

In the world of real estate financing, hard money lenders are significant players.

When consumers are turned down by traditional lenders like large banks or credit unions, hard money lenders, sometimes referred to as private lenders, provide an alternate source of finance. 

Hard money lenders, in contrast to traditional lenders, place greater emphasis on the borrower’s equity in the property rather than on their financial standing.

Compared to typical banks, hard money lenders ignore factors like income history and credit scores.

As a result, their interest in the property’s value is more significant. But occasionally, applications for hard money loans are turned down.

Regardless, investors should look for a private money lender in Baltimore and discuss how to qualify.

If you’re an investor considering taking a hard money loan to finance your real estate investment, this article is for you.

But first, let’s review the top reasons why hard money lenders will decline your application for a loan.

Top 3 Reasons A Hard Money Lender Will Decline An Application

1.) Lack Of Equity In Current Property

To qualify for a hard money loan, you will require a greater down payment if there is insufficient equity in the property to allow you to borrow against it.

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The loan will be declined if you don’t make this financial commitment. Here’s why.  

Hard money lenders simply want to assist with a portion of your purchase; they do not want to fund the entire amount.

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.

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Borrowers must still be able to show that they have the means to repay the loan, even though private lenders do not have the same strict debt coverage criteria as bank lenders.

Before issuing a rehab loan, certain lenders may also demand contingency cash.

If your cash reserves are low, some lenders might agree to add additional funds to the loan so that you can use them to pay interest up until the rehab is finished and the property is earning money.

This only applies if the property has sufficient potential value above the purchase price.

2.) Inability To Make Monthly Payments

Hard money lenders are more flexible regarding past short sales and foreclosures, credit scores, and income history.

However, they still need proof that you can make the monthly installments.

Lack of funds is a crucial warning sign that you won’t be able to repay the loan. Then, your request will be turned down. 

You must demonstrate that you are able to make the payments in order to avoid this from happening.

You ought to have sizable financial reserves on hand in case you don’t. If finances are tight, consider collaborating with a more financially secure partner.

3.) Paperwork 

While hard money loans require less paperwork and hassles than bank loans, you still need to fill out specific paperwork.

A credit report, government-issued identification, employment, income information (such as tax returns, pay stubs, or bank statements), and sometimes collateral documents are all required for loans.

You are essentially assured of being rejected if you are missing some of this information. 

Before you reapply for a personal loan, be sure all of your paperwork is in order.

Some of it might not be necessary in the end, but it’s preferable to have it on hand, just in case.

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Having all the essential papers to secure your loan demonstrates that you are committed and prepared. This is especially crucial for first-time home buyers.

What Challenges Do Borrowers Face In 2023

Given rising interest rates and tightened lending restrictions, borrowers will likely find themselves in a difficult situation as they navigate the uncertainties of 2023.

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In light of that, below are the challenges borrowers might face in 2023: 

1.) High-Interest Rates

Hard money loans are provided by private investors who are willing to take on more risk than banks and other traditional lenders in order to finance a person who might not be able to meet the standards for a bank loan due to their low credit score. 

An increased interest rate between 9 and 12% is levied in exchange for this risk.

Before agreeing to the terms of the loan, first-time borrowers should be especially certain that they can afford payments.

2.) Cash Flow For Self-employed Borrowers 

Due to businesses closing for the holidays, self-employed people frequently encounter cash flow issues at the beginning and end of the year.

Therefore, self-employed people and business owners should think about limiting their expenditures and planning ahead in the year to avoid having their payments disrupted.

Conclusion 

Since hard money lenders are simpler to work with than conventional banks, your chances of getting your request authorized are good.

Possessing equity in your house and being able to afford your monthly payments are crucial.

In addition, future deals will be considerably simpler as you build strong working ties with lenders. 

Finding the ideal property for your project, proving the property’s value and market potential, demonstrating your ability to repay the loan (including an exit strategy), and demonstrating your experience and willingness to conduct due diligence are the keys to avoiding denials from hard money lenders.