Why would a hard money loan be denied?
Hard money lenders are considered flexible, and open minded, in contrast to traditional lenders. While it’s true that hard money loans have less stringent requirements versus traditional loans, you could still face some pushback. Lenders will look at you, and your experience, and your business plan – very closely. Here are some things that might cause a hard money lender to reject your loan request.
You aren’t putting down enough equity
Applicants who plan on buying a property, or fixing and flipping, need to realize that hard money lenders want to see you have “skin in the game.” Hard money lenders will evaluate your application, and assess the chances of you succeeding. They look to see how much equity you’re putting into the project. Delancey Street looks to see how much of a down payment you’re putting down, and how much risk you’re taking. Our ideal partner has just as much risk as we do. Lenders typically look to see if the applicant has enough cash to cover the down payment on the investment property. It’s important that you be able to demonstrate that you’ll be able to complete the project – financially speaking. Keep in mind that most hard money lenders will only approve an application where the real estate investor is taking some risk/liability on his/her shoulders as well. If you expect a lender to take a 90-100% risk then it’s likely the loan will get denied. It’s important you have enough cash to cover the down payment, and other smaller bills that might arise in the future. Be prepared to show some proof of cash, so the hard money lender understands you have a plan and won’t abandon the project.
It’s important you demonstrate to the lender you have plan in place. Lenders want to make sure they’ll get repaid. You have to show your plan, and how you’ll repay the loan in the future. When you accept a hard money loan, you’re agreeing to a loan term – which means the loan has to be repaid within that period of time. If you don’t repay it, you forfeit ownership of the property to the hard money lenders. Many hard money lenders will refuse to lend you if you don’t have an exit strategy. It helps if you have cash reserves, or assets, in place to help cover the balloon payment in the event your plan fails. Most lenders prefer not to seize your collateral and sell it to settle the debt. They would rather get paid, and want to make sure the real estate investor they are working with is prepared to fulfill his obligations.
Many hard money lenders pay no attention to your credit score. However, some might look for things like bankruptcies, which signal you aren’t good with your finances.