Hard money lenders are often viewed as lenders of last resort, but that doesn’t mean that you don’t need to be prepared with a solid plan for your loan request before you submit your private loan application. The following are some of the most common reasons that hard money loans are denied with ways to avoid them.

1. The property is located in an overly dangerous or distressed neighborhood. There is a difference between finding (and rehabbing) a distressed property in an otherwise up-and-coming neighborhood and buying a run-down property in a rundown neighborhood. Private lenders will be interested in the first because it has potential to increase in value, but will likely pass on the latter because the risk that the borrower may not recoup any of the funds used to rehab the property is way too high.
2. The property is in a rural location away from a major metropolitan area. Private lenders prefer to lend on properties that have comps within a quarter to half a mile of the property (and no more than two miles away). Without comps to support the property’s value, private lenders may be less willing to approve the loan.
3. The borrower is low on cash reserves. While private lenders do not have the strict debt coverage requirements that bank lenders do, borrowers must still be able to demonstrate the ability to carry the loan. Additionally, some lenders may require contingency funds before approving a rehab loan. If you are low on cash reserves, some lenders will agree to roll extra funds into the loan that can be used to make interest payments until the rehab is complete and the property is income-producing if the property has enough potential value above the purchase price.
4. The borrower seems inexperienced or unprepared. Private lenders prefer to lend funds to borrowers who have experience investing in real estate and who are willing to perform appropriate due diligence. If you are new to real estate investing, it can help to find an experienced partner to work with. It’s also important to have the necessary documentation for the loan application ready when you approach your lender to show that you have taken the time and effort to research the property you wish to purchase.

The key to avoiding denials from hard money lenders boils down to the following: find the right property for your project, prove that the property has value and potential in the market, show that you have the resources (and exit strategy) to repay the loan, and exhibit your experience and willingness to perform due diligence.