Hard money loans provide fast flexible financing for real estate investors to fund projects like rehabs and new construction. But these short-term high-interest loans aren’t intended for long-term holds. At some point, you’ll want to refinance into a better long-term financing option.
Refinancing a hard money loan can be tricky though. You need to find the right loan program, meet eligibility requirements, and navigate the process smoothly.
In this comprehensive guide we’ll walk through everything you need to know about refinancing a hard money loan including
- Common reasons for refinancing
- Refinancing options to consider
- Step-by-step process
- Tips to get approved
- Pitfalls to avoid
- Alternatives besides refinancing
Let’s dive in!
What is a Hard Money Loan?
First, a quick refresher on what exactly hard money loans are.
Hard money loans are short-term, asset-based loans provided by private lenders and secured by real estate They are ideal for flipping houses or funding new construction because they have quick approvals, flexible terms, and easy eligibility requirements
The catch is that hard money loans come with high interest rates, usually 11-15%, and short repayment terms of 6-24 months. They also have expensive origination fees.
Hard money lenders focus on the real estate as collateral rather than the borrower’s finances. That’s why they can fund deals banks won’t touch. But the loans aren’t feasible for long-term financing.
When to Refinance a Hard Money Loan
There are several scenarios where refinancing a hard money loan makes good financial sense:
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You’ve completed renovations – Once rehab work is done, it’s time to swap short-term hard money debt for a long-term hold loan. Refinancing can lock in better rates/terms.
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You want to pull out equity – If your property has increased in value, refinancing allows you to access some of that new equity for additional projects.
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You need lower payments – Hard money loans have high monthly payments. Refinancing could significantly reduce your payments.
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You missed the maturity date – Hard money loans have short terms. If you forgot to pay it off in time, refinancing could prevent foreclosure.
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You want better loan terms – Refinancing lets you find more favorable interest rates, loan-to-value ratios, and repayment terms tailored to your goals.
If any of these scenarios apply, refinancing could be the right strategic move.
Refinancing Options for Hard Money Loans
You have several options when refinancing a hard money loan:
Conventional Mortgage
This refers to a traditional mortgage from a bank or credit union. The advantage is lower interest rates, usually 4-6%. Conventional mortgages have fixed rates and long repayment terms up to 30 years.
The catch is that you must meet strict underwriting criteria based on your finances, credit, and income. Investment properties also require 20-25% down and have higher rates.
Conventional mortgages can take 30-60 days to close. Banks don’t like lending on recently purchased properties either. Expect seasoning requirements before you can refinance.
FHA Loan
FHA loans are government-backed mortgages that are easier to qualify for than conventional loans. You can refinance with as little as 3.5% down. Rates are competitive too.
Drawbacks are a slower process and lower loan limits. FHA also imposes seasoning requirements, limits cash-out amounts, and requires owner occupancy.
Portfolio Loan
Portfolio loans are mortgages held by the lender rather than sold on the secondary market. This gives the lender more flexibility with underwriting guidelines. Portfolio loans can be a good option if you don’t qualify for agency-backed mortgages.
Just know that portfolio loan terms vary significantly by lender. Make sure to shop around for the best offers.
Rental Loan
Rental loans are long-term mortgages designed specifically for investment properties. Instead of looking at your finances, lenders focus on the rental property’s potential cash flow.
This allows investors to qualify more easily. Rental loans have quicker closings and fewer seasoning requirements too. They are a popular choice for refinancing hard money debt.
Cash-Out Refinance
A cash-out refinance converts equity in your property to cash. You take out a new loan for more than what you currently owe and receive the difference in cash. This higher loan amount comes with a higher monthly payment too.
Cash-out refinances allow investors to tap equity to fund additional projects. Just know lenders limit the amount you can cash-out. Requirements vary by program.
Step-by-Step Process to Refinance a Hard Money Loan
Follow these key steps to refinance your hard money loan:
1. Determine your goals
Be clear about what you want to accomplish by refinancing. Do you need lower monthly payments? Want to pull out equity? Have a loan maturity date approaching?
Your specific goals will determine what type of refinance loan works best. Create a list of ideal loan characteristics like rate, term, cash-out allowance, etc.
2. Assess property readiness
Most lenders want the property to be leased and producing income before they’ll approve a refinance. If repairs aren’t done yet, you may need a short-term extension from your hard money lender first.
Also evaluate if your property has increased enough in value and meets the seasoning requirements lenders impose.
3. Check your finances
Even rental loan programs will look at your credit, income, assets, and liabilities to some degree. So take inventory of your overall financial health.
Run your credit report, tally up monthly debts, collect bank statements, and gather tax returns or W-2’s. This info will be needed during underwriting.
4. Contact your existing lender
Talk to your hard money lender about options to refinance your loan with them directly. Many will offer long-term rental loans or rehab-to-perm programs. Going through your current lender can save time and fees.
If that’s not possible, ask about any prepayment penalties, early termination fees, or seasoning requirements impacting your ability to refinance.
5. Shop multiple lenders
Reaching out to multiple lenders ensures you find the best possible deal. Focus on lenders offering the type of loan you need. Get rate quotes and term sheets in writing from each.
We recommend requesting offers from 3-5 lenders to give you sufficient options to compare. Don’t apply or pay any fees yet though.
6. Choose your lender
Once you’ve received and compared all quotes, select the offer that best aligns with your goals and needs. Make sure you understand the fees involved as well.
Notify the chosen lender that you want to move forward with their offer. At this point, you will need to formally apply and pay application fees.
7. Submit your application
Your lender will provide a checklist of all documents needed to underwrite your application. This may include financial statements, tax returns, property information, appraisal, lease agreements, and more.
Compile everything required and submit it as a complete package. Respond promptly to any additional requests from underwriting.
8. Close on your new loan
If approved, you’ll receive a closing disclosure outlining the loan details and total fees and closing costs due. Review this carefully before signing.
At closing, your new loan amount will pay off the old hard money debt and any cash-out proceeds will be distributed to you.
And that’s it! With your hard money loan successfully refinanced, you can move forward with a better long-term financing solution.
Tips for Getting Approved When Refinancing
Because refinancing requires qualifying for a whole new loan, it’s not guaranteed. Here are tips to boost your chances:
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Pay down existing loans – Lenders will look at your total debt burdens. Paying down revolving balances can help your case.
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Keep up with payments – Don’t miss any payments on your hard money loan or other debts. This raises red flags.
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Limit applications – Each loan application causes hard credit pulls that ding your score. Minimize applications.
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Explain problems – If your credit or finances aren’t perfect, proactively explain any issues to your lender.
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Provide documentation – Have all needed financial statements, tax returns, and property documents ready. Thorough documentation is key.
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Consider a co-signer – Adding a co-signer with better finances may help you qualify if you can’t get approved solo.
With some prep work, you can position yourself to successfully refinance even with past credit or income problems.
Pitfalls and Problems to Avoid
While refinancing a hard money loan often makes good financial sense, there are some potential pitfalls to be aware of:
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.
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.
Refinancing out of a Hard Money Loan
FAQ
How easy is it to refinance a hard money loan?
Can you convert a hard money loan to a conventional loan?
What happens if you default on a hard money loan?
Can a hard money lender refinance in the bond market?
You have to have significant scale to be able to finance in the bond market. Most hard money lenders do not have enough scale to be able to refinance in the bond market and therefore have to work through middlemen. The introduction of middlemen into the process increases costs and uncertainty.
Can I refinance a hard money loan?
Some lenders also have internal rules that state that if you’ve owned the property less than one year, or nine months or six months, the maximum loan amount is limited to the lesser of your total cost or their max loan-to-value based on the appraised value. Talk to one of our experts for help with refinancing hard money loans today.
How long does it take to refinance a hard money loan?
It must be rent-ready. Not only that, but most lenders only let you refinance seasoned properties. So even if it’s rental-ready, you still may need to wait six months or more. Again, there are exceptions to this rule that we’ll cover shortly. The three most common ways to refinance a hard money loan are:
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.