What is a Hard Money Loan?
A hard money loan is a specialized option of financing most often used by professional real estate investors. Hard money loans are secured by a physical asset, such as real estate, that the lender can take ownership of if you default.
Traditional lenders such as banks do not provide mortgages on distressed properties, so hard loan lenders tend to be individuals or private companies. These loans are most often used in real estate as short-term bridge loans.
Before applying for a hard money loan, it would help to know the various situations when requests for a hard money loan can be denied. It will help you understand why hard money loans are rejected and how you can prevent this from happening to you.
Here are Five Reasons You are Getting Rejected by Hard Money Lenders
Not Enough Cash
Even though there are some situations when an investor can finance the entire cost of a property with hard money financing, most hard lenders won’t loan you the whole amount needed to fund a project.
The primary purpose of hard money loans is to help out with some of the investment costs. If you don’t have some of the property covered with cash in hand, it means the lender is taking all the risk. To minimize risk, hard money lenders use the loan to value (LTV) calculation. The LTV is the loan’s ratio to the property’s value. For example, if you need to borrow $650000 to finance a $1 million rental property, the LTV is 65%.
While most hard money lenders don’t want to finance more than 70%, some can cover up to 80%. Fix and flip professionals and other real estate investors need at least a 20-30% down payment to finance a property with hard money loans.
What if I need 90% financing?
A hard money lender might consider financing as high as 90% of your project, but they’ll want another piece of collateral as security, such as another piece of property you own.
To be safe, you want to have around 30% of the property covered with cash. It will make you more appealing to lenders and eliminate their need to place liens on additional properties you own.
Lack of an Exit Strategy
A clear-cut exit strategy is one of the most crucial things to have as an investor who utilizes private money or hard money loans.
Unlike other loans, hard money loans aren’t based on your credit score. Instead, you use the property as collateral. When you apply for a hard money loan, it’s crucial to have a definitive exit strategy that ensures you can pay off the interest rate.
Here are some suggestions for real estate investor exit strategies so you can be proactive about repayment:
- Refinance with a new hard money loan or a conventional loan
- Sell the property
- Use a mortgage to refinance
- Use a subprime loan to refinance
- Use business assets to pay them off
As with any debt, ensure that you have a foolproof plan for paying it off before you borrow. You sure don’t want to lose the loan’s collateral because you couldn’t pay off the balance at the end of the term.
Unable to Make the Monthly Payments
When considering whether or not to approve a hard money loan application, the lender has to determine if a borrower can make the monthly payments. The best way to demonstrate your ability to do this is to have adequate cash reserves or sufficient income to cover the holding costs.
If you don’t have enough savings in the bank and your income falls short, the hard money lender will probably see this as a red flag that you might not pay back the money and deny you the loan. If you cannot cover the monthly payments, consider seeking a financially stable partner willing to take the risk.
You Don’t have your Paperwork Ready
Even when hard money loans require much less documentation than banks, you still need to fill out some applications. While some hard money lenders will require more items to close than others, here are the most common documents needed when applying for a hard money loan:
- Purchase contract
- Sale agreement
- Forms of Identification (Individual / Business Entity)
- Proof of funds statement
- Copy of the leases
Having the paperwork ready when applying for a hard money loan shows you are serious and prepared. This is especially critical for less experienced investors. Because each hard money lender has their list of documents required, please verify in advance.
The Property is in a Bad Location
Are you buying an income property in a prime area, in the suburbs, or a rural location? Some hard money lenders will not lend on properties in remote areas or cities that do not meet a minimum population size.
If you are a new investor, consider this point especially important. A good location means better price stability and more renter interest. Since most lenders operate in major metro areas, you get more lenders to choose from, which means better rates and lower costs.
What to Do if You Were Rejected for a Loan
If a lender declines your hard money loan application, you might not know what to do next. Here are the steps you should take, right now and in the future, to prevent it from happening again.
Rejected for a personal loan? Here’s how to recover:
Identify the Cause of the Denial
It’s essential to find out why the lender declined your loan application before you apply again. Two primary factors lead lenders to deny loan applications: credit problems and issues with income. Other common reasons for being denied credit are:
- High debt-to-income ratio
- Lack of collateral
- Bad location
Regroup Before You Re-Apply
Once you have reviewed any disclosures your lender provided after declining your loan application, look at various aspects of your financial profile from a lender’s perspective to identify and resolve red flags in your credit.
- Assess your debt and income
- Examine your credit reports
- Fix errors in your credit reports
- Talk to your lender
Use Short-Term Strategies
Some actions you take might have an immediate positive effect on your profile. Short-term strategies that could result in the approval of a loan include:
- Make a sizeable down payment
- Use collateral
- Get a co-signer
- Apply elsewhere
Incorporate Long-Term Strategies
A lender might deny your loan approval due to issues in your finances that you can’t fix overnight. If this is the case, consider making more significant changes to your financial profile over time to Improve the key qualification factors:
- Build credit
- Increase income
Use a rejected loan application as a learning experience to improve your application for next time. Ultimately, these strategies will make you a better loan candidate, increasing the odds of getting approved in the future. Contact our friendly team at RTI Bridge Loans if you’d like to learn more. Call us today at (562) 857-2285!
How to Negotiate With Your Hard Money Lender
As a new real estate investor, you might fear that hard money lenders may be complex and hard to deal with. However, the truth is that many experienced and reliable hard money lenders are very easy to transact with.
So, how do you get a good deal out of them?
The key lies in better understanding your lender and what they are trying to accomplish. Here are some simple tips to get the best deal out of hard money investors:
- Know how hard money loans work
- Know where the funds come from
- Research your lender
- Prove your project’s value
- Have an exit strategy
Pro Tip: Working with your hard money lender to reduce risk and increase speed benefits both the lender and the borrower in the short-term ( one specific project) and the long-term (building a beneficial relationship).
What Can RTI Bridge Loans Do For You?
Need a reliable source of financing for your upcoming real estate project? Look no further than RTI Bridge Loans. RTI Bridge Loans has the perfect selection of hard money loans for property investors in Southern California.
RTI Bridge Loans offers a full suite of real estate loans designed to help you purchase or refinance your next:
- Rental portfolio
- Rental property
- New construction build
- Fix and flip project
- Multifamily bridge loan
At RTI Bridge Loans, you’ll find the best combination of reliability, underwriting speed, closing certainty, and customer service. You’ll also get highly competitive interest rates and flexible, favorable loan terms.
Contact us today to start your next Southern California real estate investment with financing from RTI Bridge Loans.