3 Reasons a Hard Money Lender Will Decline a Real Estate Loan
“Sometimes a real estate deal makes sense on paper but you decline to make a loan on it. What are the top 3 reasons you decline a real estate deal when the numbers make sense?”
I received a lot of different answers to this question but there were 3 reasons that were the most common from the majority of the hard money lenders I surveyed. Here are the top three reasons for declining a loan even if the numbers make sense:
1. Neighborhood: The property is located in a high crime or extremely distressed area. Sometimes this is where the good rehab properties are found, but if most of the houses in the neighborhood are all boarded up, most hard money lenders will pass on the loan. This could be called “red-lining,” but in the case of hard money rehab loans, you are just not in the same game as an FHA loan.
2. Location: The property is located outside of a major metropolitan area in a rural location where there are no sold comparables within 2 miles of the subject property. Hard money lenders prefer to lend in major metropolitan areas where sold comparables are 1/4 mile to 1/2 mile away. Although a real estate deal in a rural area may look good on paper, if there aren’t sold comps nearby to support value, a hard money lender may turn it down. Also, with a smaller market, you have a smaller pool of buyers. There are exceptions of course.
3. Cash Reserves: Particularly on a rehab loan, a borrower who seems to be undercapitalized may also receive a decline. Lenders want to make sure a borrower can afford to carry the loan. On a rehab loan, a lender wants to make sure a borrower has a contingency fund. If it seems that a borrower is scraping by to make a loan work, this may be a decline.
If you’ve been turned down for a hard money loan on a deal that made sense on paper, please share your experience. Why were you declined for the loan?
If you are a hard money lender reading this, please share your reasons for declining a real estate loan, even if the numbers made sense on paper.
Posted by Corey Curwick Dutton
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