A hard money loan is a type of loan that that is asset-based. When it comes to private money loans, hard money financing is more popular than you may realize. It is a short-term type of lending that is also commonly referred to as a bridge loan. Real estate investors, house flippers and others commonly use this type of loan to finance an investment project. The funds typically arrive very quickly, which helps when you’re trying to take advantage of a good real estate deal before someone else does.
Though they are generally easier to obtain than standard loans, not everyone can get approved for hard money lending. Here are a few possible scenarios when your hard money loan application could be denied.
1. Insufficient Experience
It’s not unusual for hard money lenders to turn down an applicant due to insufficient experience as an investor. If you don’t have any experience investing in real estate and you’re trying to get approved for a very large hard money loan, you’re less likely to get approved than if you have previous experience or if you start out with a small real estate project.
To help prevent this from happening, don’t try to get 100% loan-to-value financing. Doing this indicates to hard money lenders for real estate investing that you don’t have any experience. As a result, you’re more likely to get turned down. Borrowers with experience already know that lenders are unlikely to finance such deals because they aren’t win/win situations.
2. Too Little Equity
One of the most common reasons people get turned down for private money loans is because they don’t have enough equity in a currently-owned property to borrow against. Or, they may not have enough money to use as a down payment toward the loan. In either case, the person applying for the loan is likely to be turned down for approval.
3. No Exit Strategy
The entire point of a hard money loan is to give you short-term money. Usually, such loans are tied to payback terms of anywhere between one to three years. Some of these loans have large balloon payments at the end of the repayment period. In order for you to successfully pay off such a loan, you must have an exit strategy in mind already. Any good lender will likely ask you what your exit strategy is before providing you with a hard money loan. Common exit strategies include selling a different owned property, refinancing with a new hard money loan, refinancing with a conventional loan, or selling the property for which you’re getting the loan.
4. Inability to Handle Monthly Payments
Before approving your application, the lender will determine whether you are capable of handling the monthly payments associated with the loan. To do this, the lender will look at your income and cash reserves. If you don’t have enough of either, you will likely be turned away.
Now that you know some of the most common reasons borrowers get turned down for private money loans, you can take action. Do what you can to avoid the four common situations above and you’re more likely to receive the approval you require.