What to Do When Banks Turn Down Your Client for an Investment Property Loan

The residential real estate market is hot right now with record-low interest rates. However, one thing that hasn’t changed is that there are a lot of moving parts that have to align before a real estate deal can close. One big factor is financing, and when it comes to real estate investment, as a mortgage broker you know that it’s not always as simple as securing a traditional loan from a bank.

If you’re working with a client who wants to purchase real estate for investment purposes and the bank denies financing, it’s important to know that you have options. In fact, given the competitive nature of the market, the options for your borrower might even be more appealing than traditional financing. The more alternatives you can offer, the better able you will be to provide the solutions your clients need. 

Why Traditional Banks Might Deny a Loan

As a broker, it’s your role to find the right lending solutions for your clients. However, despite your best efforts, sometimes the process doesn’t go as planned and the bank denies your client’s application. Some of the reasons this might happen include:

The borrower doesn’t qualify.

Although interest rates are lower, lender restrictions are now more stringent than pre-recession practices. Your client might be denied a bank loan because they have: 

• Bad credit or no credit
• An inconsistent income history
• A recent change in job status
• A high debt-to-income ratio
• Made a recent large purchase
• Non-seasoned funds
• Poor tax returns or no tax returns

The property doesn’t qualify.

No matter how good the investment might be, not all properties meet the criteria required to secure a traditional bank loan. This might be because:

• The appraisal value is significantly lower than the purchase price.
• Exceeding the maximum number of rentals for conventional lending.
• The condition of the property is too poor, even if you intend to fix and flip it.

The time to close is too long.

Banks can reject a mortgage up until the time of closing, so the longer that period is, the more opportunity there is for rejection. Having a long time before closing also increases the risk that something will happen that could affect your application, such as a job change, credit event, or another factor outside of your control. 

How Clients Can Benefit from Hard Money Loans

Fortunately, you have options to offer your clients when they get denied a mortgage loan. In fact, a hard money loan offers several advantages that might even encourage you to recommend one instead of a bank loan. Some of the reasons your clients might benefit from a hard money loan include:  

• Approval is based on equity, not financial history or credit scores.
• Hard money loans are more flexible in terms of property use, allowing fix and flips, rentals, and short-term rentals.
• Real estate investors have the ability to do all-cash offers, giving them a competitive advantage. 
• Private loans can close in 5-10 days, not weeks or the 30+ days it takes most banks, providing an additional edge over other buyers. 
• Clients can secure multiple loans for multiple properties and aren’t limited to a single residence, opening up even more investment opportunities.

How to Secure Hard Money Loans for Your Real Estate Investors  

As a broker, you have a direct line to alternative lenders. Build a relationship with a local hard money lender that has experience with the types of deals you typically handle. Because of the advantages they offer, consider coming to a hard money lender first for certain types of opportunities. When your clients skip going to a traditional bank, they can save time on closing and have a more competitive offer.

We recommend discussing the various types of loans with your clients early in the process so they know their options if they get turned down. The more products you can offer, the better you can meet the various needs of your real estate investor clients. In many cases, they might opt to start with a hard money loan because they can move more quickly.  

If you’d like to learn more about Socotra Capital and the types of loans we can offer your clients, contact us today.