Hard money loans are a good choice for short-term financing. However, there are times when you’ll need to get this type of loan, and it might be denied.
If you’re a real estate investor, keep reading to learn the top reasons why your application might be denied.
- Equity Concerns
- Lack of an Exit Strategy
- Not Enough Money to Make Monthly Payments
If you’re looking to invest in a rental property and need a hard money loan, you may be surprised to learn that most lenders won’t approve your application. They have strict requirements for the amount of equity in a property before they consider lending money against it.
This is because lenders aren’t keen on financing the purchase price since it would leave them with nothing if the borrower defaulted on their loan. These loans are only meant to help with some of the investment costs associated with buying and renovating real estate.
Most lenders want at least 25% equity to consider a loan application. Suppose the property doesn’t have this much equity. In that case, you’ll need to come up with a larger down payment to offset the difference between what is owed on the property and what it might sell for after renovations are complete (assuming there aren’t any other liens against it).
Lack of an Exit Strategy
If you are looking to get a loan from a private money lender, they will want to know what your exit strategy is. They probably won’t give you a loan if you don’t have one.
They want to know your exit strategy because they want to make sure that their investment is safe. They don’t want to invest in something and not be able to get their money back.
They are also worried about how long it will take for you to repay them. If it takes too long, they could lose out on interest payments and possibly even lose some of their initial investment.
So if you’re looking for a loan from a private money lender, make sure that you have an exit strategy!
Not Enough Money to Make Monthly Payments
You’ve heard the saying: “The rich get richer, and the poor get poorer.” According to the statistics, this is true. If you’re an investor with a small budget and need money to start your business or expand it, it can be difficult to find investors who will give you money. This can be especially true if you have a low income or no assets.
If your income falls short, lenders see this as an indicator that you might not pay back the money. You can prevent a denial because of income shortfalls by proving with income statements and bank statements that you have the money to follow through with your financial obligation. Investors that don’t have substantial cash reserves often team up with more financially stable partners to avoid being denied.
Are you ready to apply for one of these loans? Although the interest rates are too high in many cases, you have a wide selection of loan options from which to choose. The more research you do, and the better you understand the financial terms of the loan, the easier the decision will be. Some moneylenders specialize in these types of loans, so check out a few before making your decision.