Real Estate Investors typically find it easier to get pre-approved with a Hard Money Lender than a Conventional Bank. As a Hard Money Lender, our pre-approval process can take less than 24 hours once your application is completed. Unlike a conventional bank, a hard money lender tends to be more lenient on credit scores, income, and/or work history. So, let’s break down the reasons why a Borrower may not get their loan request approved.
1. The Borrower Doesn’t have Enough Cash Reserves to Demonstrate their Ability to Make Monthly Payments.
Most lenders will require at least 6 months or more in payment reserves. Having proof of liquidity demonstrates that you as the Borrower have sufficient reserves to cover the monthly payments and the holding costs of the property. It’s a red flag to the lender when the borrower doesn’t have enough reserves in the bank. Having a partner who has the funds to invest in the deal is a great solution.
2. The Borrower Doesn’t Have an Exit Strategy
Hard Money Loans for Fix and Flips, Bridge, New Construction, and Multifamily are short-term loans ranging from 6-to-36 months. These short-term loans are typically interest only payments with a large balloon payment due at the end of the loan term. Knowing your exit strategy allows the lender to plan accordingly for funding deals in the future.
Common exit strategies include Selling the Property -or- Refinancing into a Long-Term Loan. These options can include refinancing with a Hard Money or Conventional Lender.
3. The Borrower Doesn’t have Enough Cash for the Down Payment
This will be the most common reason a borrower will not get approved with a Hard Money Lender. It’s a common practice for hard money lenders to fund 85% to 90% LTV (Loan-to-Value) or Loan-to-Cost. The borrower must show proof that there are enough cash reserves available for the down payment plus the closing cost you’re required to bring to the closing table.
Purchasing a property at a lower price than the current market value with “built-in equity” does not substitute the requirement for the down payment. A hard money lender will require the borrower to have their own money invested in the deal. This is also referred to as having “skin in the game”.
Working with a hard money lender and getting pre-approved is a quick and easy process, but it will require due diligence on both sides. If you’re working with a hard money lender like Coastal Equity Group, our team provides clear guidelines of our process, required documentation, and works quickly and ethically throughout the underwriting process to get your loan closed.