Why Hard Money Loans Get Denied?

Hard money lenders have less stringent requirements than their conventional counterparts. They are collateral-based and, as such, are less focused on the borrower’s income or credit history. That does not mean that every loan denied by a bank or a credit union can be easily approved by a hard money lender. Far from it. Hard money lenders serve a unique and relatively narrow niche. They work exclusively with investors looking to snatch a promising real estate investment opportunity. Yes, hard money lenders have streamlined underwriting, and their hard money loans can close quickly, but only when it makes sense for both the borrower and the lender. Let’s explore the main reasons your hard money loan application can get denied.

No sufficient profit: The main goal of investing is to make money. When we look at the deal at New Funding Resources, the first thing we check is whether our borrower can make a profit by flipping this property. It typically depends on whether you are buying a property at a price discounted enough to make renovating and selling it worthwhile financially. The higher the profit, the less risky the transaction is for both the borrower and the lender. If the lender feels that the collateral is strong (i.e. the property has a lot of equity), they can lend their borrower more money. The higher the loan amount, the less of their own funds the borrower needs to contribute, improving their liquidity and managing their risk further.

With no profit to be made, the whole point of the transaction is moot, isn’t it? For those who are not exactly sure how to estimate it (and trust me, it’s not as easy as subtracting your purchase price and renovation costs from the after-repair value), use our hard money loan caclulator.

Borrower’s Financial Position: Being a real estate investor means that you have some funds to invest. There are some exceptions to this rule (for example, you’ve inherited a property with plenty of equity), but generally, the more expensive the project, the more of your funds of your own you need. As a private hard money lender, we get plenty of inquiries from applicants with little or no savings—unfortunately, most of their hard money loan applications result in denial. For more details, see our article on why zero-down hard money loans are a pipe dream.

Market Risks: If the property is in an unstable or declining market, the lender may decline your hard money loan. For example, we have been lending in Baltimore City for almost 20 years and have a robust lending portfolio there. Yet, we’ve seen many of our borrowers struggle with low-priced homes located in the city’s rougher parts. Yes, the price points are attractive, but they are counterbalanced by high risks. This is why lenders might be reluctant to lend in the areas where their borrowers struggle to make a profit and where their loans consistently underperform.

Inexperienced Borrower: Here is another common reason hard money loans get denied: lack of investing experience. Many hard money lenders do not lend to new investors because working with them is high risk. You never know whether they can execute their plans or are just blowing hot air. At New Funding Resources, we take a different approach. We know that even the most successful investors had to start somewhere. This is the risk we are willing to take and we know how to manage it. But not all projects lend themselves easily and safely to a new investor.

I would like to give you an example. Suppose you are a new real estate investor with enough funds to fix-and-flip an older townhouse in Frederick you purchased for $250K. The renovations are of cosmetic natures: a new kitchen, updates to the bathrooms, new floors, and new coat of paint adding up to $50K in remodelling. This is a perfect property for a new rehabber to learn the trade and make some money.

There is a different story if that new investor decides to convert a home in Washington, DC into a luxury apartment building. The project requires hands-on knowledged of how to navigate DC permitting bureaucracy. The borrower also needs to understand the current architectural and interior design trends and have a tested crew to deliver the quality work. Is it possible for a  brand new real estate investor to rise up to these challenges? Possibly yes, but many lenders would find that risk exceeding their appetites.

Unrealistic or Too Speculative Project: If the investment strategy, such as a fix-and-flip or rental plan, lacks supporting documentation or seems overly ambitious, the lender might not feel confident in the deal. Let’s take as an example an ambitious project to turn an old farm into a conference center and Airbnb. How do you expect to calculate its after-repair value? It might be a great idea that will eventually make you rich, but it’s almost impossible to evaluate from an asset-based lender perspective.

Another example of a hard money loan that might get denied is a project requiring an extensive, opaque expansion. We usually see it unfold like this. A real estate investor is interested in a single-family property that generates little profit if renovated with the current square footage intact. But wait! What if we make the existing crawlspace a fully functioning basement? Better yet, what if we add another level? Or two? The reality is that the investor is looking for a lender to help him or her fit a square peg into a round hole increasing risk for everyone involved.

In conclusion, while hard money loans offer a streamlined and flexible financing option for real estate investors, they are not guaranteed approvals for every deal. These loans are designed to balance the lender’s risk with the borrower’s potential for success, which is why factors such as sufficient profit margins, financial readiness, market conditions, experience level, and realistic project planning are crucial. At New Funding Resources, we strive to work with investors who present strong opportunities and well-considered strategies. By understanding these common reasons for hard money loan denial and aligning your goals with a lender’s criteria, you can better position yourself to successfully secure the funding needed for your real estate ventures.