Can You Get a Real Estate Loan on an Investment Property if a Bank Turns You Down?

Can You Get a Real Estate Loan on an Investment Property if a Bank Turns You Down

There are many reasons why your real estate loan application was denied. Fortunately, you have alternatives to help you get the money you need to invest in real estate property in some of the hottest markets on the map. Traditional lending institutions are often far more stringent in their approval criteria. At the same time, hard money lenders offer a wide range of advantages for the consumer with an unconventional investment strategy or a complicated credit history. For these borrowers, hard money loans are the better choice as they come with many favorable benefits.

When you have been turned down for a real estate loan by your bank, you can still get the financing you need for purchasing residential or commercial real estate through hard money lending sources.

Common Reasons Why a Real Estate Loan May Be Denied

Conventional lenders such as banks or credit unions have strict approval guidelines to determine whether or not the applicant is a low-risk borrower. As a result, an investor seeking conventional loans from a traditional financing source may find his or her loan application rejected for various reasons.

Credit History

The most common among these reasons is a complicated credit report with a score that may fall below the criteria. The Creditworthiness of the applicant is often determined by his or her credit report including debt-to-income ratio, credit score, the amount being borrowed, and other factors related to the financial situation of the applicant that inform lenders if the individual is a good credit risk.

But this can be difficult for some investors who may earn a high annual income while carrying higher than usual amounts of debt as well as investors who own too many properties at once. In both instances, traditional lenders view these applicants as high-risk borrowers.

Property Ownership

An applicant’s real estate loan approval is often contingent upon the borrower applying for that financing under his or her name. However, some investors who intend to purchase a property for ownership by a Limited Liability Company (LLC) will opt not to put their name on the loan, and that can be a problem for traditional lending institutions. An application can be denied if the borrower is attempting to take out a real estate loan on behalf of a group of investors instead of his or her own name.

Condition of the Property Being Purchased

Many investors will apply for residential loans or commercial real estate loans to purchase property that needs extensive renovations or repair work. However, that can pose a problem for traditional banks and financiers as they will often require an assessment of the property in question. If the condition of that property fails to meet the lenders’ approval criteria, the loan is likely to be denied. Banks get very skittish about lending money to borrowers who plan to invest in property that the lender deems uninhabitable at the time of purchase.
Navigating Property Concerns

What is a Hard Money Loan?

A hard money loan is a form of asset-based financing typically used for purchasing real estate property. These types of loans are offered by lenders who will use that property as collateral in the event the borrower defaults on the loan. 

Hard money lenders are often the preferred choice over traditional financiers like banks and credit unions because hard money offers more flexible terms and conditions and requires far less time to approve and process a borrower’s application as the funding can be accessible to the borrower in a matter of days instead of weeks.

The Advantages of Working with a Hard Money Lender

Investors who have been turned down for conventional loans due to the reasons above may be able to get the financing they need with a hard money loan. For starters, hard money lenders place a greater emphasis on the value of the property being purchased over the borrower’s credit history when deciding to approve a loan application. This allows an investor to obtain the funds needed to purchase an asset in a competitive market.

Consider the following reasons why hard money lending is a viable alternative in the event your bank has turned you down for a real estate loan:

Expedited Approval Process

The underwriting process for loan approval can be complicated and take weeks, even months, for a bank or credit union to review the application and decide whether or not the applicant qualifies to borrow the requested amount.

But when you work with a hard money lender, your application can be reviewed and approved on a significantly faster timeline – days. That can put you at an advantage over other investors who are aiming to buy the same property.

Flexible Loan Terms

Since hard money loans operate differently from conventional lending arrangements with traditional lenders, the terms of hard money loans can be far more flexible with respect to interest rates, repayment periods, and even the amount that an applicant can request to borrow.

If you have been turned down for a real estate loan by a bank, hard money lenders may not only approve your application but allow you to tailor the terms and conditions of the lending agreement. For example, available options are having interest reserved at closing (no interest payments) or being allocated extra funding for completed renovations.

Also, although the length of a hard money loan is typically one year, it can be structured out to as long as three years, if needed. The loans also offer extension options (typically in 6 or 12-month increments), which many investors like and consider a safety feature of the loan – if things don’t go to plan, more time is available to find a solution for alternative financing.

Navigating Property Concerns

The condition of the property being purchased by the investor applying for the home loan can also be the reason why an application is turned down by a bank or credit union. Traditional lenders get very nervous approving residential loans or commercial real estate loans for a property that needs a significant amount of repairs or renovation work. Their stringent underwriting criteria include an assessment of the value of the property and if major refurbishments are required just to get the property ready for occupancy (or obtain a CO), banks tend to shy away.

The history of the property also matters to banks. If the property has a poor rental history, has outstanding violations, or has significant unpaid taxes, these are reasons for a bank to turn down a loan.

Hard money lenders are different. Investors will often turn to hard money when they want to buy a residential or commercial property that needs extensive repairs because hard money lenders consider the Repair Value (ARV) of the property in their underwriting criteria. Furthermore, hard money lenders can overlook the property history and can make loans on distressed properties. This could mean physical distress, back taxes, or violations, as discussed above.

The bottom line is if the property has value, even if there are various factors going against it, a hard money lender will make the loan.

Condition of the Property Being Purchased

Has Your Bank Turned You Down for an Investment Real Estate Loan?

Investors having difficulty getting a real estate loan due to their credit scores or their lenders’ underwriting criteria have alternative loan options to consider: hard money lending. If this is a familiar refrain and you need money fast to swoop in on a potentially lucrative real estate opportunity, a hard money loan may be the solution.

Hard money lenders provide real estate asset-based loans that are flexible in nature, at interest rates that are reasonable (certainly much better than credit card debt and generally better than personal loans).

This is not to suggest that hard money lenders don’t have any underwriting guidelines and restrictions on loan applications – far from it – but the lending criteria are focused on the property. Hard money lenders will also run a credit check, but you do not need strong credit, just no history of significant credit problems like foreclosures or heavy litigations. If all checks out, you’re good to go.

If the bank won’t approve your loan, explore the hard money route. In two weeks, you’ll be glad you did.

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