Hard money loans are a popular financing option for real estate investors looking to fund fixes, flips, and other short-term projects. But these loans eventually need to be paid off or refinanced into longer-term financing. This raises the question – can you refinance a hard money loan?
The short answer is yes, you can refinance out of a hard money loan. However, it’s not always a straightforward process. There are some unique factors to consider when refinancing a hard money loan compared to a conventional mortgage.
In this article we’ll overview everything real estate investors need to know about refinancing hard money loans including
- The pros and cons of refinancing
- Refinancing requirements
- Types of loans to refinance into
- Tips for a smooth refinance process
The Pros and Cons of Refinancing a Hard Money Loan
Before diving into the details, let’s look at some of the potential benefits and drawbacks of refinancing a hard money loan:
Pros
- Lower interest rate to reduce monthly payments
- Cash-out to access your property’s equity
- Longer loan term for flexibility
- Pay off high-interest hard money debt
- Potentially fewer restrictions than hard money
Cons:
- Refinancing costs like appraisal and origination fees
- Prepayment penalties may apply on your hard money loan
- Have to re-qualify for new financing
- Property may need to be seasoned before refinancing
- Rates may still be higher than primary financing
As you can see, there are good reasons to refinance. But you need to weigh the costs versus rewards based on your situation.
Hard Money Loan Refinancing Requirements
When refinancing into a conventional loan, you’ll generally need to meet similar requirements as you would when purchasing a property:
- Credit score – Most lenders want 650+
- Down payment – 20-25% often needed for best rates/terms
- Debt-to-income ratio – Below 50% is ideal
- Loan-to-value ratio – The lower the better
- Seasoning – Owned for 6+ months in most cases
- Property condition – Must be rent-ready
Hard money lenders themselves may offer portfolio loans with fewer restrictions. But you still need to qualify based on their standards.
Having a solid credit score, equity, and ample reserves goes a long way. Keep your hard money payments on-time too.
Types of Loans to Refinance Hard Money Into
You have several options when refinancing a hard money loan:
Conventional Loans
These include Fannie Mae, Freddie Mac, FHA, and bank portfolio loans. You must meet the lender’s mortgage qualification standards. But they offer low fixed rates.
Portfolio Investment Loans
Many private lenders offer portfolio loans tailored to real estate investors. These loans are less strict than conventional mortgages. Lenders focus more on the property/deal.
Seller Financing
The seller carries back a portion of the financing at an agreed-upon interest rate. This can help investors who don’t qualify for other loans.
Hard Money Refinancing
Some hard money lenders themselves offer refinancing of their own loans into longer-term products. This avoids having to requalify with a new lender.
Shop multiple options to find the best fit based on your financials, property, and goals.
Tips for a Smooth Hard Money Loan Refinance Process
Follow these tips to help streamline refinancing from a hard money loan:
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Check your hard money loan agreement – Understand any prepayment penalties or early termination fees. Factor these costs into your decision.
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Let your hard money lender know – Communicate that you plan to refinance so they can provide payoff information in a timely manner.
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Have your ducks in a row – Get all of your financial documents in order, have the property appraised, and take care of any repairs. This avoids delays.
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Shop multiple lenders – Compare interest rates and fees to make sure you get the best deal. Ask about rate locks.
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Close on time – Refinance transactions can fall apart if not closed by the rate lock expiration. Stay on top of timelines.
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Pay off your hard money loan – You don’t want two loans on the property. Pay off the hard money loan as soon as possible after refinancing.
With the right prep work and timeline management, the process can go smoothly.
Scenario Refinancing Examples
Let’s look at a few examples of investors refinancing hard money loans to see the options:
Scenario 1: Sara used a hard money loan to fund a flip project. Now that the home is renovated, she wants to refinance into a 30-year conventional loan to hold as a rental. She has great credit and the appraisal comes in high. Sara is easily able to qualify for a low fixed-rate mortgage.
Scenario 2: Matt also used hard money for a flip, but he has credit challenges. He won’t qualify for a conventional refinance. Instead, Matt’s hard money lender offers a portfolio loan product for fix-and-hold investors. The interest rate is a little higher but he is able to refinance successfully.
Scenario 3: Amanda wants to tap into her property’s new equity after a rehab but doesn’t qualify for other financing. She refinances with the seller who agrees to carry back 20% of the purchase price at 7% interest. This allows Amanda to pay off her hard money loan.
As you can see, there are a variety of options based on your goals, financials, and property specifics.
When Refinancing into a Conventional Loan Isn’t Feasible
For investors who don’t qualify to refinance into traditional financing, here are some alternatives to consider:
- Seller financing as mentioned above
- Assume the existing hard money loan (if allowed)
- Take on a business partner who can qualify
- Get an equity partner to refinance in their name
- Seek another hard money loan or private lender
A qualified mortgage broker can help assess all of your options even in challenging situations.
The Bottom Line
Refinancing a hard money loan is possible, but does require some strategic planning. Compare your options, run the numbers, and pick the alternative that fits your current needs and long-term goals for the property. While refinancing has costs, it can allow you to retain your investment with more favorable financing terms.
Conventional bank loansAs mentioned, to refinance with a conventional loan, you need to meet all the typical requirements. These can vary by lender and your unique financial situation, but in general, they include:
- Minimum equity: 20% for cash-out refinance; as little as 5% for rate-and-term refinance
- Mortgage insurance: Required if less than 20% equity
- Credit score: > 620 in most cases
- DTI: < 50%
- Loan amount: $548,250 maximum in 2021, with a few exceptions
- Seasoning for cash-out refinance loan: Six months is standard, but varies by lender and state
Traditional lenders also like to verify your income via W-2s. If you don’t have W-2 income, you have to jump through even more hoops. Again, these rules aren’t set in stone. But in many cases, refinancing a hard money loan with a traditional mortgage can be challenging. Banks tend to shy away from risk. And if your investment property doesn’t pass their high standards, you’ll need to refinance elsewhere.
- Lower interest rates for those with a strong credit history
- Strict property and borrower requirements
- More paperwork
- Longer process
- You can secure funding in as little as two weeks (rather than two months).
- Private money lenders look for solid investments with strong cash flow. They place less emphasis on your personal qualifications.
- They may waive seasoning requirements if you have a signed lease.
If you’re following the
- Loan-to-value (LTV): 80% maximum
- Credit score: > 660
- Loan amount: $2,000,000 maximum
- Property value: > $100,000
- Debt service coverage ratio: 1.10 minimum
- Seasoning for cash-out refinance loan: own the property for 6 months
Rental loan rates aren’t quite as low as conventional loans, but in many cases, the benefits are worth it — especially if you don’t qualify for any other type of loan.
- May approve loans for properties that don’t meet conventional lender standards
- Less paperwork
- Shave months off closing time
- Flexible loan options
- Potentially no seasoning
- No cap on the number of loans
- Slightly higher interest rates
If you’re interested in refinancing a hard money loan into a rental loan, we can help.
How to qualify for refinancingBefore exploring your different options for refinancing, let’s make sure you qualify. The exact requirements depend on the type of loan you choose, but they can be broken into two categories.
- Conventional bank loans
- Government-backed loans
- Long-term rental loans
Each has unique advantages and disadvantages, so let’s take a closer look.
Refinancing out of a Hard Money Loan
FAQ
Can you convert a hard money loan to a conventional loan?
How do I pay off a hard money loan?
Do hard money loans show up on credit?
What are typical terms for a hard money loan?
Should you refinance a hard money loan?
But in many cases, refinancing a hard money loan with a traditional mortgage can be challenging. Banks tend to shy away from risk. And if your investment property doesn’t pass their high standards, you’ll need to refinance elsewhere. Pros: Cons: Rental loans are long-term loans designed specifically for real estate investors.
What happens if you refinance a hard money loan early?
Many hard money lenders have prepayment penalties or garaunteed interest payments for specific time periods. These could be as long as 6-12 months. Be sure to double check if you’ll be on the hook for additional payments even if you refinance out of the loan early.
Can I refinance a hard money construction loan into a long-term loan?
You can reduce that risk by using one lender for hard money construction loans and another for your long-term rental loans. Visio Lending can help you refinance your hard money loan into a long-term loan with a lower rate for your rental properties.
Can a hard money lender kill a refinance?
As part of the refinancing process, your new lender will request a payoff from your hard money lender. That payoff likely will disclose if you’ve had late payments and/or late fees, which will then trigger a bunch of questions from your new lender and could easily kill your refinance.