The unfortunate reality is that many people who need a real estate loan cannot qualify for necessary financing through a bank, credit union or other financial institution. One of the reasons why some applicants are denied the financing that they need relates to the number of outstanding real estate loans that they have. Commercial lenders typically do not have this type of borrower requirement, and many commercial real estate investors have a dozen or more investment properties that are each leveraged with one or two real estate loans. However, residential real estate lenders typically do have this type of requirement for applicants.
Traditional real estate lenders may limit you to having between four to eight leveraged residential properties at a time. Be aware that this is not a federal or state regulation. Instead, it is a specific requirement that the individual lender has. This means that if you have been denied financing because of this reason with one lender, you may still qualify for a loan with another lender. Because of how common this type of lending requirement is with traditional real estate lenders, it may be easier for some applicants to apply for a hard money loan to overcome this challenge.
How Other Outstanding Loans Impact Your Qualification
Using leverage for real estate investments is an excellent benefit that many investors understandably want to take advantage of. The challenge associated with carrying many outstanding loans relates to liquidity and the ability to navigate through downturns and other issues. Imagine if you have ten properties that were each significantly leveraged and turning a minimal profit. If the market took a turn downward and occupancy dropped in several of these properties at the same time, you may have to dig into your liquid cash reserve to stay afloat until the market rebounded. On the other hand, if most of your loans were almost paid off when this happened and you had a huge cash reserve, the downturn may not be a major issue.
With this in mind, some lenders will analyze your entire financial situation closely to determine your qualification status rather than make a flat decision about approval based on the number of loans that you have.
Understanding Hard Money Lender Requirements
Each hard money lender has unique underwriting requirements and guidelines. Most do not have stringent requirements regarding the number of loans that you can carry at any given time. They do, however, look at the overall risk associated with extending a loan to you. Your total loan balance in relation to total property value plays into this risk. In addition, your overall net income and liquidity also will be considered.
Hard money lenders are typically more agreeable to higher-risk situations that do not conform to traditional lenders’ guidelines and requirements. However, this does not mean that a hard money lender will approve a loan request that does not make sense or that has considerable risks. Remember that hard money loans have a much lower maximum loan-to-value than what you will find with a traditional real estate loan. To qualify for a hard money loan, you may have to put 35 to 40 percent down or more. In the event that this empties your cash reserves and you have a portfolio of highly-leveraged real estate that is barely turning a profit, you can see that this scenario is riskier for a lender to consider. While the number of loans does not usually impact a hard money lender’s approval decision, the overall impact of leveraged real estate on your financial situation will be taken into account.
How to Determine If You Qualify for a Hard Money Loan
Your primary goal right now may be to determine if you qualify for a hard money loan. After you have been turned down for financing with one or more other lenders, it is understandable that you may feel discouraged about the options. You may even be thinking about walking away from the opportunity in front of you because of the perception that financing is not available. However, before you give up, reach out to a few hard money lenders. It is not feasible to get a firm answer from a hard money lender by simply speaking with a lending rep over the phone. Because the full loan scenario will be examined for approval determining, you need to submit a complete loan request to a few hard money lenders.
If you have been turned down for financing with other lenders because of the number of leveraged properties that you own, this may not be an issue with a hard money lender. To determine with certainty what your options are, reach out to a few hard money lenders. However, keep in mind that you may still need to address the leveraged properties later when you try to apply for a permanent loan within the next year or two.
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