Whatever your experience level is in investing, I’d guess that loan approval is still a major obstacle for you on some of your deals (if not most of them).
Loan approval, in general, is a huge topic to cover . . .
Rather than try to cover it all, I’m just going to talk about the area that I think you should focus on the most. What I mean is where your loan approval really begins — the kind of property that you find.
Especially for new investors, I’d say that 90% or more of denied loans could have been avoided simply by looking for the right kinds of properties to begin with.
Below I’ve listed 7 of the most common property types and property features that will get between you and your loan approval for a hard money loan.
Here they are . . .
Property Types and Features to Avoid for Loan Approval
#1 – Busy Streets
If the investment property that you’re looking at is on a busy street, you can forget about getting a hard money loan for the flip. Even if the property is too close to a busy street, some lenders may not pick up the deal
Solution: Focus on properties on residential streets that are far away from any major thoroughfares.
#2 – Under 900 ft. sq.
Small homes are another property type to avoid. Just like with homes on or near busy streets, smaller homes have a hard time getting sold quickly, which makes hard money lenders nervous and less likely to loan on the deal.
Solution: Look for bigger properties. 900 sq. ft. and larger is a good rule of thumb. If you stay at 900 sq. ft. or higher, your chances of getting a loan are much better.
#3 – 2 Bedroom Homes
This one is closely related to #2. Just like homes with low square footage, homes with only 2 or fewer bedrooms also have a hard time selling. Because hard money lenders will only lend on properties with a high likelihood of selling quickly, you want to avoid 2 bedroom homes at all costs (pun intended).
Solution: If it doesn’t have 3 or more bedrooms, MOVE ON.
Advanced Tip: This tip is for more experienced investors out there. Although 2 bedroom homes should be avoided, generally speaking, they also present a good flipping opportunity for experienced investors. If the rest of the property checks out and the LTV ratio is good, some 2 bedroom homes can be rehabbed with a 3rd bedroom for very good profits.
I only recommend this tactic for more experienced investors because rehabs that include room additions are a bit more risky and much more complicated than the traditional type of rehab.
#4 – Structural Damage
Pretty obvious tip here, but you’d be surprised by how many deals get submitted to us involving properties with significant structural damage . . .
Cracked foundations and leaking roofs are some of the better known forms of structural damage. In short, if the property has significant structural damage, don’t dare touch it with a 20 foot . . . offer.
Solution: Only pursue properties that are 100% structurally sound.
#5 – Commercial Areas
Most of you probably know that it’s smart to avoid properties near commercial areas, but sometimes it’s hard to tell what “too close” and “far enough away” are.
Generally speaking, you want your investment property to be at least a couple of blocks away from any commercial development. If there’s a grocery store or office building right next door, forget about it.
Solution: Limit your property searches to non-commercial areas. If a property that you’re interested is close to a commercial area, just make sure it is at least a couple of blocks away from commercial development on all sides.
#6 – Rural Areas
Alas, properties in rural areas have a tough time selling fast as well. This is often a big bummer because these properties tend to sit among some very attractive surroundings.
That being said, I’d recommend that you steer clear of these.
Solution: Keep your property searches to urban and sub-urban areas only.
#7 – High Rental Areas
If the majority of homes in an area are rented (instead of owned), there’s most likely a good reason for that. The area, for any number of reasons, just doesn’t attract buyers.
It’s smart to treat the signal of a high rental area as a big “Don’t Try to Invest Here” sign.
Solution: Avoid high rental areas as though they are time-sucking black holes of lost profits.
To Wrap It Up
These are just a few of the types of properties to avoid to have a better shot at hard money loan approval, but they are seven of the most common types that cause hang ups.
I thought I’d keep the post nice and simple this week, so I’m going to leave it at that. Follow these tips, and you’ll get loans faster and easier, freeing you up to move on to the next property and the next big profit.