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Why Hard Money Loans Rarely Close
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Why Hard Money Loans Rarely CloseDaniel Dobbs2025-03-12T17:50:41-07:00
Note: I very rarely post “uncomplimentary” articles about the business practice of other lenders, but agents should know if your client needs hard $$ to COE, you should both know the process.
Two or three times a month, I get requests for “hard money” (aka “Alt Doc/ Sub Prime”) loans from buyers.
Most inquiries are last-minute, desperate, as contingency deadlines are expiring, and it’s evident that Conventional / FHA financing is not the answer.
Hard money is perceived to be the last “Hail Mary” to save the deal. The bad news is that even when buyers have hard money options, they rarely choose to proceed to close escrow.
For those who proceed, many obstacles present themselves, and very few hard money loans close escrow. In the meantime, the agent is left twisting in the wind as buyer and seller frustrations boil!
Here’s why:
1) There is no computerized loan (DU) process for quick approvals, and most hard money lenders will not even provide a pre-approval letter giving the buyer an approximate rate and term.
If a seller won’t list their home for sale until they are confident about qualifying for a new home loan, an agent is stuck between a rock and a hard place. “
3) Hard $$ blenders have a high turnover with account executives. In the last year, I’ve funded two “alt doc loans” (bank statements) only to have other hard $$ lenders repeatedly call me over and over again, seemingly with a different A/E.
When I quiz them about what they can offer my clients, they are “long on sizzle and short on steak”. Most are just not very experienced in underwriting loans themselves.
That leads to A/Es making promises for rates and fees for their companies that aren’t available.
Hence, I very rarely take in hard $$ applications. (no letters please)
4) Most lenders /brokers receive few requests for this type of lending and often haven’t cultivated deep relationships with hard-money investors.
Brokers send the buyer’s loan app to another (hard) money broker, who sends it somewhere else, dragging out the process, adding fees, and “time-killing” the deal.
5) Buyers themselves desperately apply “all over town”
The buyer’s credit report now shows an obvious paper trail of “credit inquiries“, their scores decreasing (3-5 pts). Most hard $$ buyers are usually a little low on their Ficos, so these multiple inquiries bury them further.
Because there are so many inquiries (and no MLO wants to be “a backup lender” any more than you want to be “a backup real estate agent”), few MLOs will really “drop everything” and commit to working the loan because only loans with the best chances of closing take first priority.
6) Lie, lie, lie some more. As buyers are turned down for conventional financing, they become desperate, and their “misrepresentations and obfuscations” increase and further drag out the COE. Drama, Drama, Drama. Exhausting.
Simply put, once clients (in their highly charged emotional state) start lying, they continue and get better at it! That’s when the fraud sets in.
Desperate buyers do desperate things! Subsequently, they drag the agent (unknowingly) into their scheme. The best agent defense is an experienced MLO with open lines of communication (who will tip you off).
Most lenders will simply “ghost” the agent, as they don’t want to be sucked into the drama or any legal issues. All the while this is going on, agents get sucked into this drama and pay an emotional price – when they could be working with viable clients!
6) Rates and Fees = Buyer Payment Shock
With Fannie and Freddie pricing (May 12, 2022) nearing a 5% (30-year loan) rate, hard $$ loans are now ranging from 9.9% to 11.9% with 2-4 points and higher fees vs. conventional financing.
7) Terms
Typically its 2-5 yr. Fixed, “Interest Only”, with 1-2 year “pre-pay” penalty
8) Down payment
30-40% down, if it’s a “fixer” home, more may be required to cover repairs.
9) “Alt Doc” Bank Statement Loans (12-24 months)
These are fundable; see a post that further describes bank statement loans.
10) Here are the “Typically” Underwriting Guidelines for Hard $$
Typically, the down payment is 30-40%, and buyers must have 6 months’ “reserves” for all properties and 700 minimum Fico scores.
These criteria eliminate 90% of the buyers. Also, the down payment money must come from a personal account; “business funds” can’t be used for a down payment.
Usually, business owners or self-employed buyers become reluctant to withdraw a large sum of “operating cash” to buy a home.
The last heartbreaker is revealed only during the final underwriting step, which is a “QC check” (quality control).
Hard money/Alt Doc loans are “high-cost loans” that can only be used to purchase or refinance investment properties, not primary residences.
If a buyer is trying to purchase a “primary residence” with a hard $$ loan and has no other property, hard money lenders will be forced to decline the deal (but only at the very last moment—trust me on this; it happened on a deal I originated).
My Service = Your Commission Checks
Please Call Me to Pre-Qual Your Buyers
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