While hard money and private capital loans are typically easier and faster to obtain than traditional bank loans, there are mistakes that you can make in the request process that will result in your request being denied.

Although hard money and private capital lenders are willing to overlook issues such as low credit scores, credit history blemishes, and lack of income history that are major stumbling blocks for bank lenders, these lenders do still want assurance that a borrower intends to repay the loan. With this in mind, there are three repayment-related pitfalls that you want to avoid when requesting a hard money loan:

1. The borrower doesn’t have any skin in the game. Although in some situations it is possible to get a hard money loan that covers 100% of a property’s purchase price, most lenders will want to see that the borrower has some of their own money invested in the property as well so that they will be less likely to just walk away if problems arise. Usually, lenders will expect you to have 25% of the purchase price, either in cash of your own or as equity in other real estate that you own.
2. The borrower doesn’t have the cash to make monthly payments. Most hard money loans require interest-only monthly payments for the term of the loan, with the principal of the loan only due at the end of the term (usually six months to two years). This means that the monthly payments can be less than a traditional loan; however, as with a bank lender, a private lender will still want to see that the borrower has sufficient income or cash reserves to cover these monthly payments as well as any renovation or rehabilitation projects that are needed.
3. The borrower doesn’t have an exit strategy. As mentioned in number 2, hard money loans are generally short-term with a large balloon payment due at the end of the term. Because of this, few borrowers actually plan to pay the loan back in cash at the end of the term. Private lenders will want to see that you have thought through your project from start to finish and have at least one strategy planned out to repay their loan (though having a back-up exit strategy never hurts). Common exit strategies include selling the property, refinancing with a new loan, or draw from an alternative cash source.

Even the best project can get denied if it succumbs to these pitfalls. However, one of the major ways in which hard money and private capital lenders set themselves apart from traditional lenders is their willingness to craft loans to fit projects rather than forcing projects to fit loans, so if you have a good relationship with a hard money lender and a well-developed plan, then you may be able to work around some of these issues.

If you have questions about submitting a hard money request to Montegra, contact us at 303-377-4181.