Hard money lenders are often considered to be among the most flexible options for obtaining financing. While it’s true that the requirements are usually less stringent than the qualifications set by banks and similar institutions, these lenders do examine specific aspects of the applicant’s financial situation closely. Here are a few of the things that would cause a hard money lender to reject an application.
Not Enough Equity or the Money for a Down Payment
Applicants who are planning on buying a property, making improvements, and then selling the property at a profit often use hard money loans for the financing. When the lender evaluates the application, two questions will come to mind. The first one has to do with the equity in the asset the applicant is willing to pledge for the loan. A second one has to do with whether the applicant has the cash to cover the down payment on that investment property.
Maybe your plan is to use your personal home as the loan collateral. Assuming the home is not mortgaged and in good condition, the lender will look at the equity based on the current market value. Keep in mind the lender will only approve an application that’s 70% or less than the equity in the property. If your application is for more than that, expect the application to be denied.
Having the cash to cover the down payment on your investment property is important. That tells the hard money lender that you have made adequate preparations and do have a plan for covering all the costs associated with your project. You would do well to have the down payment on hand before you submit an application.
There’s a Question About the Ability to Make Timely Loan Payments
How will you make the loan payments until your project begins to generate income? The hard money lender will need proof you can manage the payments based on the average income you have coming in each month. Unless you can provide information that will satisfy the lender, the odds of being approved are not high.
No Backup Plan
Sometimes referred to as an exit strategy, your backup plan is a secondary way you will honor the terms and conditions of the hard money loan if things don’t work out as you planned. Maybe the home you renovate remains on the market longer than you expected? Do you have cash reserves or assets you can convert to make the balloon payment that comes at the end of many hard money loans?
Even if the collateral you pledge could be seized by the lender and sold to settle your debt, most lenders prefer to not go through the hassle. They would rather deal with an applicant who already has a contingency plan in place. If you don’t, create a realistic one before submitting your application.
It’s true that hard money lenders pay little to no attention to your credit score. That doesn’t mean they will pay no attention to the comments found on your credit reports. In fact, they will look at those comments closely before making a decision about your application.
If you have a recent bankruptcy on your reports, that is a red flag that will lead to more questions. What caused you to file bankruptcy? Do those circumstances still exist? If there is any indication that your financial management skills have not improved or that the cause for the bankruptcy is likely to occur again, the lender is less likely to approve your application.
Charge-offs are essentially confirmations issued by creditors that they aren’t expecting to ever receive any payments on outstanding debts. Most creditors will wait until at least six months of receiving no payments occurs. At that point, they may charge off the debt and submit a comment to that effect to the major credit bureaus.
Charge-offs understandably make hard money lenders nervous. If you have a few on your credit reports and they occurred in the last couple of years, the lender is less likely to approve your application.
Accounts in Collections
Any confirmation that you have one or more loans or credit card accounts in collections will also discourage most hard money lenders from working with you. That’s because those accounts indicate you have not managed your finances properly, leading to the need to involve a collection agency. Hard money lenders are more flexible, but they still want clients who are highly likely to repay those loans on time and without falling behind on the payments.
Remember that most hard money lenders are individuals or small groups of individuals. They do have more flexibility than large institutions when it comes to approving loan applications. If you do have some issues that require some explaining, the fact that you can sit down with the lender personally and talk through the problem could increase the odds of being approved. Even if the loan application is rejected, what you learn may allow you to work on your finances and be approved at a later date.