What are the most common reasons Hard Money Loan Applications get denied?
While closing on a Hard Money Loan is definitely faster & easier than closing on bank financing, especially for investment properties… this type of real estate investment financing is not for everyone!
There are probably hundreds of narrow, highly specific reasons a private loan will get denied, but after seeing thousands of prospective borrowers, we can easily narrow it down to the 2 most common reasons people get denied & are unable to close on a Hard Money Loan.
Reason #1: Lack of Liquid Cash On Hand
By far, the most common reason Borrowers get denied on a Hard Money Loan is lack of liquid cash on hand.
For a new acquisition, most Hard Money Loans will require you to cover, in ‘cash’ out of pocket:
- about 20% – 40% of the Purchase Price (borrowing at a 60% – 80% LTV),
- 3% – 6% of the total loan balance in closing costs & fees, and
- probably some portion of the rehab costs (which will be reimbursed in draws after the work is completed).
Even refinances will require 4% – 10% of the total loan amount paid at closing to cover expenses like the Origination Fee and Closing Costs, though in some rare cases, some exceptions can be made where these fees are paid out of the actual loan amount at closing.
If being unable to afford this hefty price tag is the problem you’re facing, you’re definitely not alone. This is hands-down the most common reason prospective Borrowers get denied.
As with many things in the finance world:
The people who need it the most can’t get it; the ones who need it the least can get the most.
Unfortunately, even in Private Hard Money Lending, it’s still a numbers game and this is just the way it works.
When you don’t have enough liquid cash on hand to do the deal, you basically only have 2 options:
- Save up the cash yourself. This can be a long, arduous process, only to then risk it all on a speculative real estate investment with 65% – 75% leverage! However, if you’re successful, this will be the most profitable approach for you as the Borrower.
- Find an equity partner who has the cash. This is also tricky, depending on your circle of contacts & experience raising capital. In some senses it can be easier, because a wealthy enough investor can allow you to skip the loan altogether (though it might not always be the best cash on cash return, as mentioned in the Hard Money Borrower’s Guide). Worst of all, with an equity partner, you’ll be splitting the profits in half (or worse), meaning even if things go well, you won’t make as much.
Personally, I’ve done both, and really wouldn’t say this is an either / or decision.
It ultimately comes down to doing the deal whichever way you can get the money!
The key component is The Deal Itself. If you have hot deals but no money, you can find equity partners with cash.
It’s not easy, but hot deals speak for themselves if they’re legit, and there are successful real estate investors with deep pockets in every local market.
No matter what, you’ll definitely need to be able to cover a reasonable down payment + fees + closing costs, which is why a lack of liquid cash on hand is by far the most common reason people get denied on Hard Money Financing.
Reason #2: Lack of Income for Monthly Payments
The second most common reason Borrowers get denied on a Hard Money Loan application is lack of income to cover monthly payments.
This is a distant 2nd place after Reason #1 above, because the monthly carrying costs of Hard Money Loans are much lower & more bearable to most Investors than the initial down payment required.
While the monthly payment will significantly depend on the duration of the loan term (eg: shorter term loans will typically have higher monthly payments), nearly every Private Hard Money Loan will require some type of monthly payment in the range of 0.3% to 1% of the total loan balance, per month.
If you don’t have the stable income to cover the monthly payments for the duration of the loan, it will be crucial to have enough Liquid Cash On Hand to cover at least 6 – 12 months of payments. This is what we look for in otherwise qualified Borrowers who just don’t have an adequate, consistent, and/or provable / verifiable income.
Runners Up: Other Reasons for Denial
Other than these 2 primary reasons, there are a few other far less common reasons a prospective Borrower might get denied on their Hard Money Loan.
Here is a snapshot at several of the more common reasons we have to deny a prospective transaction or borrower:
- Minimum Loan Balance Too Low. Depending on the transaction type, our Minimum Loan Balances range from $70k (for Single Family) to $250k (for Commercial / Apartment Buildings). While some Loans can be completed on lower balances, many cannot. If your property value or loan amount is too low, this is a common reason for a Denial.
- Bad Location / Bad Neighborhood. Some properties are just in a location that is unfundable. The most common reason for this is areas with very high crime rates, very low property values, and/or very long “average time on market” stats (ie: a very cold local market).
- Unrealistic Exit Strategy. This only applies on short-term loans, and we as a Lender can usually help you present this in a way that will get you Approved, but if your Exit Strategy is otherwise unrealistic, unbelievable, or poorly planned, it can possibly lead to a Denial.
- Credit Score. While we have Hard Money Loans that can be attained by Borrowers with credit scores in the mid 500s, below that, or with a recent Foreclosure or Bankruptcy, this can conceivably be a reason for Denial. However, it’s rare, since as an Asset Based Lender, we can usually find a loan option that minimizes or even ignores credit score in favor of equity in The Deal Itself.
- Lack of Experience. This is the rarest reason for Denial, as we are totally equipped to fund even first time Investors. The main reason your Lack of Experience can lead to a Denial is when it is compounded with any of the other factors listed above.
We do everything we can to make Hard Money Loans of a wide variety accessible to most Borrowers.
However, taking on large Real Estate Investment Loans is not always the right choice for just anyone.
If you have a deal in mind that you’d like to get a Personalized Rate Quote for (and to simply check if you can get Pre-Approved in the first place), please take the time to fill out our quick, online:
Once you fill that out, one of our Financing Specialists will review your scenario and get back to you within 24 – 48 hours with either:
- a conditional Pre-Approval & ballpark Personalized Rate Quote, or
- a tentative Rejection with the details as to exactly why we weren’t able to get you Approved based on the details you provided.