Best excuse to decline funding a loan

6 Replies

I've heard of many reasons to decline funding a mortgage over the years but this one is a new one to me.

From a HARD MONEY LENDER not a bank. You'll recognize the name when I post it (not now) as they advertise here on BP. When I pull up the list of HMLs for Florida they pay to be near the top of every page. Their reason for declining was "The subject property is a legal non-conforming use that cannot be rebuilt to it's current configuration and density." The property is not a true duplex, it's 2 separate houses built on the same lot in the 1950s. It's always been used as rentals with only 2 years out of the past 25 being homesteaded (That requires owner-occupancy). It's a total of 3 beds and 3 baths. The present mortgage balance is 25% of the value and we wanted to re-finance to 50% and use the excess cash on another property. It would also be our 4th loan thru this HML. It presently NETS $500 a door (that's no typo).

Now, let's go over their excuse. Rebuilding the property requires it to be 85% destroyed by fire or flood. We have both insurances and if it was destroyed the insurance would pay off the morgage and leave us with $50K.  but if the larger house was destroyed that would only be 66% (and the smaller house 33%). So they would be paid off if the property was destroyed.

 But if I wanted to rebuild the property I could put up a 5 bed/ 5 bath house worth over $400K. Three houses like that went up this year on the next block and 6 more are under construction one block north or south of the is property (same neighborhood).

They won't be the first HML to lose my business. I just don't like the idea of hitting up family and friends for private money. So fellow BPers what do you think? Do you have a bigger BS excuse for having a loan declined?

I had a HML whose lawyer, the day before closing, decided he didn't like the name of our LLC as it was recorded with the state. Now mind this is a HML and lawyer who is based in Texas, reviewing the documents for a Missouri LLC. The LLC has been operational for over a year, filed taxes, has all the accepted paperwork from the state including a certificate of good standing, but they didn't like nomenclature.

Not doing business with them again. 

Originally posted by @David Oberlander :

I've heard of many reasons to decline funding a mortgage over the years but this one is a new one to me.

From a HARD MONEY LENDER not a bank. You'll recognize the name when I post it (not now) as they advertise here on BP. When I pull up the list of HMLs for Florida they pay to be near the top of every page. Their reason for declining was "The subject property is a legal non-conforming use that cannot be rebuilt to it's current configuration and density." The property is not a true duplex, it's 2 separate houses built on the same lot in the 1950s. It's always been used as rentals with only 2 years out of the past 25 being homesteaded (That requires owner-occupancy). It's a total of 3 beds and 3 baths. The present mortgage balance is 25% of the value and we wanted to re-finance to 50% and use the excess cash on another property. It would also be our 4th loan thru this HML. It presently NETS $500 a door (that's no typo).

Now, let's go over their excuse. Rebuilding the property requires it to be 85% destroyed by fire or flood. We have both insurances and if it was destroyed the insurance would pay off the morgage and leave us with $50K.  but if the larger house was destroyed that would only be 66% (and the smaller house 33%). So they would be paid off if the property was destroyed.

 But if I wanted to rebuild the property I could put up a 5 bed/ 5 bath house worth over $400K. Three houses like that went up this year on the next block and 6 more are under construction one block north or south of the is property (same neighborhood).

They won't be the first HML to lose my business. I just don't like the idea of hitting up family and friends for private money. So fellow BPers what do you think? Do you have a bigger BS excuse for having a loan declined?

That actually doesn't surprise me at all, if it's a lender in that gray area in between non-qm and HML, call it 8% to rate and 2% to fees range. The loan is mostly asset based, the property itself being the asset. If they aren't worried about your personal income, credit, etc, then of course they will error on the conservative side when it comes to the real estate itself, if they are coming in strong on the rate/fee/terms combo.

Speculation, but I bet a true HML @ 13% and 3 points w/ a 3 year prepayment penalty wouldn't have an issue. I've never ventured into the HML world, and stopped offering non-qm, because 95% of people don't believe me when I say that rate/fee shopping these loans is 95% about how much risk tolerance you want the lender/underwriter to have, and 5% about getting a "better deal." These loans aren't about "better deal" v "worse deal," they are about "deal" v "NO deal, oh and you will find out at the 11th hour when all contingencies have been released."

If my speculation is off, and this lender was already at the true HML rate/fee/terms range, then I'd suggest finding another... people and institutions wanting to loan money out with double digit rates, and crazy points and all that, are a dime a dozen.

lots of reasons to pass on loans. we decline loans all the time, customers may think it's an excuse but it's just business. When we don't want to do a loan, we decline. In your case, the lender didn't like the asset, that isn't an excuse it's just a reason you don't seem to be happy about. 

fact is if it were a rock solid asset as you say, a traditional bank would have picked the terms up. When a hard money lender won't touch an asset I would take that as reason to be concerned. 

also, details matter here. Like Chris said, if it's a true hard money lender who is making money on the front through points/rate then you can find another pretty easily. Lending is super loose right now 


Every lender has their risk tolerances and comfort zones. If your loan request doesn't meet their criteria then thank them and move on. If multiple lenders refuse to lend to you then perhaps contemplate the remote idea that perhaps the issue, if there is an issue, is not at the lenders end.

Lenders have sweet spots for where they like to lend. They might have investors with preferences on where their capital is lent or outside loan clearing houses with rules and requirements. 

Most of all, lenders don't owe you money. It is theirs to lend if they so feel inclined. In fact the market is so hot right now that any lender not super busy should consider their business model.

If you have a property that falls through the lending cracks, consider approaching a good loan broker that can shop around amongst lenders for you. 

Best of luck.

@Alexander Felice   Another thing civilians don't realize is lenders normally have investors  be it a bank line of credit like I have and have had.  Hedge fund  private investors what ever.

HML are not uber rich people ( normally) that are just sitting on wads of cash to lend out they have to go to market for investors just like anyone else..

To do that they write up their loan guidelines IE wont do any loans for more than 80% ARV all borrowers must have 10% down at least FICO minimum 640 no flood plains etc. whatever it is.

So non conforming use may be in their guidelines they pitched their investors.. so its just a hard no when its a non conforming use.. they don't have the ability to change what they told their investors just because one borrower rationalizes that its  a great loan or that they are miffed and will no longer use them.. 

its pretty funny really how the public and investors who really don't know how lending works get all wound up when THEIR deal gets turned down.

Originally posted by @Jay Hinrichs :

@Alexander Felice  Another thing civilians don't realize is lenders normally have investors  be it a bank line of credit like I have and have had.  Hedge fund  private investors what ever.

HML are not uber rich people ( normally) that are just sitting on wads of cash to lend out they have to go to market for investors just like anyone else..

To do that they write up their loan guidelines IE wont do any loans for more than 80% ARV all borrowers must have 10% down at least FICO minimum 640 no flood plains etc. whatever it is.

So non conforming use may be in their guidelines they pitched their investors.. so its just a hard no when its a non conforming use.. they don't have the ability to change what they told their investors just because one borrower rationalizes that its  a great loan or that they are miffed and will no longer use them.. 

its pretty funny really how the public and investors who really don't know how lending works get all wound up when THEIR deal gets turned down.

I try not to be too hard on people not understanding banking, I didn't realize how little I knew until I got deep into lending. 

Biggest thing I try to express about banking is the same as what you just said: every bank has a different internal motive.

They are not all the same, they don't have the same guidelines, they don't like the same kind of loans. Individual personalities on credit boards MATTER for lending decisions and everyone is working with limited resources so each deal has to fit their over arching goal and culture. 

Having a loan turned down could mean the deal is lousy, it could just mean the person who was underwriting it doesn't want it. We turn down deals here for BIZARRE reasons, sometimes the credit board just doesn't like the business type, sometimes underwriters get a weird feeling about a borrower, sometimes it's as simple as too many loans in one industry (concentrations). 

HML have the same issues but exacerbated because they are usually a smaller group of people with more skin in the game and even more limited resources.

I agree with your last point, people getting mad that a bank turned down their loan. To me, I look at that and say "why did they turn it down, maybe they are scared of something you should be more scared of" LOL 

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