What to Do If You’re Denied a Hard Money Loan

Have you ever been denied a hard money loan? Typically, these loans are known for being fairly easy to obtain. However, each lender has different requirements and expectations for borrowers, which can result in a denial for one reason or another. Today, we’re reviewing some of the top reasons hard money loans get denied, what to do if you’re denied a loan, and how to improve your chances of getting approved. 

Contents of This Article: 

• Top Reasons Hard Money Loans Get Denied
• What to Do if You’re Denied a Hard Money Loan
• How to Improve Your Chances of Getting a Loan
• Find the Right Loan for Your Next Investment

Top Reasons Hard Money Loans Get Denied

You can get denied a hard money loan for a number of reasons. A common misconception about private money financing is that anyone can get a loan. While they’re easier to obtain than other loan types, you must still meet certain requirements to be approved. That said, here are some of the top reasons you may be denied a hard money loan. 

1. Not Enough Equity or Collateral- Hard money loans are asset-based, which means the property’s value secures the loan. If the property lacks equity or the value isn’t favorable for the lender, they may deny the loan.
2. Unrealistic After-Repair Value (ARV)- Lenders evaluate the after-repair value (ARV) for fix-and-flip projects. That said, it can be a red flag if your proposed ARV seems unrealistic or unsupported by data.
3. Lack of Experience- Hard money lenders typically want to work with more experienced investors. If you don’t have much investing experience, the lender may hesitate to fund the loan.
4. Incomplete or Inaccurate Documentation- Although hard money loans require less documentation than traditional loans, lenders still need to see certain documents. Missing paperwork like a property appraisal, title report, or proof of funds can lead to denial.
5. Poor Property Condition- While money lenders often work with unconventional properties, certain conditions like severe structural damage may make a property too risky.
6. High Loan-to-Value (LTV) Ratio- Hard money lenders typically allow an LTV ratio of around 50% to 70% or even higher. If the loan amount you request is any higher, the lender may reject your application.
7. Unrealistic Exit Strategy- Lenders want to see a clear plan for you to repay the loan, whether you sell the property, refinance it, or use it as a rental. A lender will likely deny your application if you don’t have a plan or your plan seems unrealistic.

What to Do If You’re Denied a Hard Money Loan

Uh oh–your hard money loan application was denied. Now what? Don’t worry; while it’s a bummer that you were denied, you can take a few steps to understand the reason for the denial and increase your chances of getting one in the future. 

1. Understand Why You Were Denied
2. Address Specific Issues
3. Explore Other Lenders
4. Improve Your Finances
5. Prepare Your Documentation
6. Reevaluate the Property

Understand Why You Were Denied

Getting denied a hard money loan can be frustrating. That said, the first thing you’ll want to do is understand why you were denied. So, reach out to the lender and ask for feedback. They may have denied your application due to insufficient equity in the property, an unrealistic ARV, a weak exit strategy, or not providing enough documentation. Knowing why they denied your application can help you fix the issues for next time. 

Address Specific Issues

Once you’ve figured out why you were denied a loan, take action to address the issue at hand. For instance, if you don’t have a good enough exit strategy, restructure and create a clear, detailed plan for yourself, and you’ll repay the loan at the end of the term. Or, if the property’s condition is a concern, look for a less-distressed property to finance and flip. You can also offer a larger down payment to reduce the lender’s risk. 

Explore Other Lenders

Not all hard money lenders are the same when it comes to their requirements and expectations. So, just because one lender denied your application doesn’t mean another won’t approve it. Try to look for lenders that specialize in your type of investment, have flexible underwriting policies, and are recommended by other investors. 

Improve Your Finances

While hard money loans are asset-based and don’t rely too heavily on your financial circumstances, improving your financial standing can still influence a lender’s decision. For instance, saving for a larger down payment or improving your credit score can make your application more attractive and less risky for a lender. 

Prepare Your Documentation

When applying for any type of loan, you typically have to provide several documents pertaining to the property, your finances, etc. If you’re applying for a loan, ensure you provide a professional appraisal, detailed project plans, proof of funds for the down payment, and a timeline and budget. Providing all of this information can help you secure a loan. 

Reevaluate the Property

If the property itself is the issue, there are a few things you can do. For instance, you can negotiate with the seller or property owner to lower the price. Or, you can look for a different property with fewer red flags and more potential for a successful fix-and-flip. 

How to Improve Your Chances of Getting a Loan

Nobody wants to get denied for a loan. However, if your application gets denied, there are a few things you can do to improve your chances of getting a loan. Here are a few tips to consider. 

• Improve Your Credit- Your credit profile is important when applying for any loan. If your credit score is low, it could be a red flag. So, pay any outstanding debts and avoid taking on new debt before applying.
• Reduce Your Debt-to-Income Ratio- Lenders prefer a lower debt-to-income ratio. So, try to pay down existing debts to lower your DTI ratio and avoid taking on new financial obligations before you apply for a loan.
• Increase Your Down Payment- A larger down payment is more appealing to lenders. So, consider offering a significant down payment to reduce the lender’s risk and improve your loan terms.

Find the Right Loan for Your Next Investment

Getting denied a hard money loan can feel defeating. However, just because you’re denied now doesn’t mean you will be in the future. Understand the lender’s decision and try to improve your application and finances to increase your chances of approval next time. 

If you’re looking for a hard money loan for your next investment project, contact Maryland Hard Money Lenders today. Our team of real estate loan professionals can help you get funded quickly and efficiently. Learn more about our lending process or fill out our initial loan application today!