Understand the possible reasons you may be denied for a private money loan to help better plan your financing strategy.

There are many reasons why real estate investors might seek out private money loans instead of more traditional avenues of mortgage lending. Not only is credit rating generally not a factor, but these loans can be much more expeditious than borrowing from banks.

This is because private lenders are more interested in collateral than credit, as well as the plan for seeing return on investment from real estate projects like house flipping, rental properties, or other commercial interests. Because funding comes from an individual or a group of private investors, you won’t have to jump through the same hoops as with traditional lenders.

That said, there is no guarantee you’ll be approved for the funding you seek when you approach private money lenders, especially if you are unaware of their criteria for lending. Here are a few reasons why such loans are commonly denied.

Insufficient Capital or Collateral

Private money lending relies not on credit scores or history, like traditional loans, but instead on what you bring to the table. This includes any capital and collateral you can provide. If you have nothing to contribute to your proposed real estate project, you’re taking no risk, and why would investors want to take on all the risk for your gain?

You must therefore come prepared with a sizable down payment and/or collateral that reduces risk for investors. They’re often willing to overlook your current and past credit issues if there’s a suitable amount of collateral involved.

Lack of Ongoing Income

In addition to providing a down payment and some kind of insurance policy via collateral, you also have to prove that you can make payments on your loan. This requires a steady stream of income. The amount of your loan will depend on your ability to make monthly payments.

Poor Planning

When you’re purchasing property as an investment, you must have a plan of action in place to make it pay off, ideally sooner rather than later. Private money loans, by their nature, are intended to be short term. Usually the terms require repayment with 1-3 years.

For this reason, certain aspects of your plan could prove problematic when it comes to obtaining loan approval. Property in an unsuitable location, for example, could tank your project. Areas with higher turnover and values (urban areas) but low crime rates tend to be the best bet.

Your plan must also include exit strategies that will show returns. Ultimately, investors want assurances they’ll get their money back with interest.