Take advantage of emerging market opportunities even when your bank says no, opting for alternative financing options. Most investors default to traditional lenders when they’re ready to take on big real estate projects, and that decision has a lot of merit to it because you can access long-term loans at the lowest rates, especially if you have a great credit score. However, if your credit score is too low or you don’t have sufficient cash to meet your down payment it may seem like your dream of home ownership is dead in the water.
Other solutions can help you purchase your first or next rental even when banks say no, so let’s have a look:
Common Reasons Banks Say No
Low Credit Score
Brace up for a denial if your credit score is too low. Generally, traditional institutions practice caution when selecting their borrowers, and a lower credit score may not be ideal. After all, things like debt-to-income ratio, credit availability, and how quickly you pay your bills weigh heavily on your overall creditworthiness. Thus, a low credit score often indicates a history of financial mismanagement, making you a high-risk bet to traditional bankers.
Insufficient Cash Flow
Provide enough documentation that you have a stable income to secure a traditional bank loan. Banks are known to be averse to doing business with anyone that could potentially be a liability. As a result, you could still have a high credit score and have your loan rejected if you can’t show that you have sufficient cash flow to cover your repayments.
In other words, you need to show proof of employment or other supplementary income as evidence that you can repay the bank when due.
The Challenges of Relying on Traditional Banks
Strict Eligibility Requirement
Prepare to meet up with the bank’s strict eligibility criteria if you want approval. Traditional institutions tend to demand a lot from investors looking to get a loan. Your credit score can be near perfect, your financial history shiny, and you need a proven source of income. Thus, these criteria often act as a barrier for startups or small businesses with no financial track records.
Aside from that, it also means that financial mistakes you may have made in the past could continue to haunt you through credit records.
Slow Approval Timeline
Exercise a lot of patience when applying for a bank loan. Traditional banks involve a lot of bureaucracy and background checks to ensure you meet up with their strict requirements. As a result, they’re notorious for having one of the slowest financing timelines, which means you could lose out on time-bound opportunities.
You could spend as much as 6 weeks filling and praying for approval at multiple rounds of review, depending on the bank you opt for.
Limited Flexibility
Be ready to work on the bank’s terms or not at all when opting for a traditional loan. Unlike other financing methods that offer borrowers some leeway on when to pay back or how to spread out their payments, banks have fixed terms and are often unwilling to budge. Thus, if you’re looking for a lender with customizable options, this method may not be the best option for you.
Top Alternative Financing Options
Hard Money Loans
Get quick approval at flexible terms by opting for hard money loans. Hard money loans offer one of the fastest financing solutions for investors because they’re backed by private lenders. This is a great option for investors working on a time-sensitive frame. However, hard money loans tend to incur higher interest rates than typical bank loans, which makes repayments more difficult especially considering they’re short-term loans.
Working with bridge loan experts in Maryland could also be a great alternative for investors looking for a short-term solution.
Seller Financing
Ask the seller of the property you’re eyeing if they’d be willing to front your purchase through seller financing. Rather than involve middling third parties like banks and private lenders, you could try striking a deal with the property owner yourself. This option allows you to negotiate directly with the homeowner who can offer more flexible repayment schedules while eliminating the need to meet strict bank criteria.
Crowdfunding
Pool resources together with other investors to make expensive property purchases. Try to work with trusted people who are also looking to get into the real estate business. Aside from allowing you to purchase larger and potentially more profitable purchases, this option also limits your risk by allowing each investor to contribute a small amount.
How to Choose the Right Alternative Financing Option
Evaluate Your Financial Situation
Assess your current financial state to understand which options are realistic for you. If you know where you stand with your credit score, current cash flow, and available assets, you can easily determine whether you’re a shoo-in for a bank loan approval or if looking for seller financing will be wiser. For instance, a hard money loan may be more suitable if you have valuable collateral but a low credit score.
On the other hand, if you don’t have collateral but have strong business projections you could ask other investors to pool resources together through crowdfunding.
Compare Terms and Conditions
Don’t leave any money on the table when choosing a financing option. You always have to compare the total cost, fees, and repayment schedules to find the best deal even when shopping between different lenders that offer the same method. Beyond helping you avoid financial strain, it also gives you more wiggle room during negotiations when you know you have options.
Conclusion
Find alternative financing options when banks say no. Traditional lending isn’t the only path to home ownership, and if you’re looking to become a property owner or expand your portfolio, it would be best to know you have multiple options.
Investors with low credit scores or an unstable cash flow are most likely to come up short when facing the bank’s stiff criteria. Combined with traditional institutions having a slow approval time and rigid policies, the conventional may not be for you.
Research other options that could fit your unique situation, such as hard money loans for lenders short on time, seller financing for potentially cheaper rates, or crowdfunding if you’re low on capital. Just make sure to evaluate your financial situation and compare terms between lenders before signing off on your loan.