Hard money loans provide real estate investors with quick financing to fund fix-and-flip projects, new construction, and other deals. But these short-term, high-interest loans aren’t intended for long-term holds. At some point you’ll want to refinance into a lower-rate conventional or rental property mortgage.
Refinancing a hard money loan can be tricky, though. Many traditional lenders shy away from freshly-rehabbed properties and borrowers with less-than-pristine finances. Thankfully, alternatives exist if you know where to look.
This comprehensive guide will walk through the entire process of refinancing a hard money loan. We’ll cover:
- Pros and cons of refinancing
- Step-by-step process
- Qualification and documentation
- Refinancing into a rental property loan
- Using a lender that specializes in hard money refinances
- 8 tips to get approved
- Refinancing alternatives
Let’s get started on how to successfully transition away from hard money loan financing
The Pros and Cons of Refinancing a Hard Money Loan
Before diving into the specifics, let’s look at some potential advantages and drawbacks of refinancing a hard money loan:
Pros
- Lower interest rate = lower monthly payments
- Longer repayment term eases cash flow
- Tap remaining equity for other deals
- Build relationships with conventional lenders
- Potentially higher rents and/or property value
Cons
- Closing costs and fees
- Meeting stricter eligibility requirements
- Providing lots of documentation
- Limits on cash-out amounts
- May need to wait 6+ months if not “seasoned”
Refinancing can provide major savings and flexibility. But also involves tradeoffs. Assess your own situation to decide if now’s the right time.
Step-by-Step Process to Refinance a Hard Money Loan
Refinancing a hard money loan into a conventional mortgage or long-term rental property loan follows a similar process as getting a regular purchase loan. Here are the typical steps:
1. Find a lender – More on qualifying and lender options later. But first shop around and get pre-approved.
2. Submit loan application and documentation – Be ready to provide financial records, proof of income and assets, property info, and more.
3. Get an appraisal – The lender will assess the property’s current market value. This determines how much they’ll lend.
4. Receive loan decision – It may take a few weeks to months to get approved once the lender reviews everything.
5. Finalize loan terms – Negotiate the specifics like loan amount, rate, fees, and cash-out amount.
6. Close on new loan – Sign paperwork and the lender pays off your hard money loan balance.
7. Make your first payment – Payments on the new mortgage start 30-60 days after closing.
Now let’s look at qualifying for refinancing and picking the right type of lender.
Refinancing a Hard Money Loan Qualification and Documentation
To refinance away from hard money into a longer-term real estate loan, you’ll likely need:
Good credit – Most lenders want at least a 620 FICO score, but 660+ is better.
Sufficient equity – If less than 20%, you’ll pay PMI or may not qualify.
Seasoning – The property needs to be rented out for 6+ months in many cases.
Income/employment – Stable income helps. Provide paystubs, tax returns, and W-2s.
Assets – Bank statements prove you have reserves to cover the new mortgage.
Appraisal – The property must appraise for enough to support the requested loan amount.
Pay history – On-time payments on the hard money loan help your case.
Lease agreement – For a rental property, show you have tenants lined up.
Purchase contract – To verify how much you originally paid for the property.
Rehab documentation – Invoices for improvements help support the current value.
Property inspection – The lender may want to assess in-person too.
Providing everything the lender requests helps ensure a smooth refinancing process. Now let’s explore some different loan programs.
Refinancing a Hard Money Loan into a Rental Property Loan
Traditional mortgage lenders can be hesitant to refinance properties right out of rehab. Instead, consider “rental property loans” offered by private lenders.
With a rental loan, the lender evaluates the deal’s profit potential rather than focusing on your personal creditworthiness. They offer long-term mortgages designed specifically for investor-owned properties.
Benefits of Rental Property Loans
- More flexible borrowing criteria
- Often no seasoning requirement
- Quicker closing timelines
- Lower rates than hard money loans
- Ability to tap all your remaining equity
Look for rental loan lenders active in your real estate market. They’ll be more familiar with working with investors like you.
Working With a Hard Money Loan Refinancing Specialist
Another option is to refinance right back through a lender specializing in hard money loans. Many will roll your construction loan directly into a permanent rental mortgage.
The benefits of staying with your original hard money lender include:
- Familiarity with your previous loan
- Streamlined application and approval
- Potentially no seasoning requirement
- Lower fees compared to switching lenders
Ask if your current lender offers commercial loans or rental property mortgages you can transition into. This simplifies the entire refinancing process.
8 Tips for Getting Approved When Refinancing a Hard Money Loan
If your current finances or the property itself don’t meet typical bank standards, here are some tips to boost your odds of approval:
1. Pay down debts to improve your DTI ratio
2. Build up your credit score and history
3. Wait to apply until the property is 100% rented
4. Put down a larger down payment when you buy the property
5. Highlight future property appreciation potential
6. Provide evidence of rehab quality and value add
7. Shop niche rental property lenders and hard money lenders
8. Offer to pay points to reduce the interest rate
Getting turned down once doesn’t mean you’re out of options. Adjust your strategy based on feedback from lenders to get to a “yes” on your next application.
Alternatives if You Can’t Refinance the Hard Money Loan
If you try but can’t refinance your hard money loan after several attempts, several options remain:
Ask the lender for an extension – Many will tack on a few extra months for a fee.
Make interest-only payments – Keep paying just the monthly interest to buy more time.
Look for alternative financing – Explore seller financing, loans from private investors, etc.
Sell the property – As a last resort, put it on the market and walk away with your equity.
Bring in partners – Offer share of ownership for help securing refinancing.
Get creative and leverage your relationships to find capital if traditional lending routes don’t work out. With persistence, you can find a solution.
Recap and Next Steps
Refinancing a hard money loan can provide real benefits but also involves hurdles. Following the steps below helps set yourself up for success:
-
Prepare documentation and get finances in order
-
Shop rental property and hard money lenders
-
Highlight the deal’s strong cash flow potential
-
Negotiate the most favorable loan terms possible
-
Close on time to avoid higher extension fees
-
Manage the new long-term mortgage prudently
With proper preparation and focusing on the right lending partners, you can smoothly transition your freshly rehabbed property from short-term to permanent financing.
This allows you to pull out your capital for the next deal while keeping your existing rental asset working for you. The process takes diligence and patience, but the reward is well worth the effort.
So tackle the obstacles systematically, stick with it through setbacks, and you’ll come out the other side with a lower-rate mortgage perfect for the long haul. The flexibility this provides will pay dividends for your real estate business’s future growth.
You’ve made it this far reading, so you’re already ahead of the game. Now it’s time to take action and start having conversations with potential lenders. The next chapter of your hard money loan story awaits…go make it a profitable one!
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.
Can you REFINANCE a HARD MONEY LOAN? | No Debt to Income Ratio Required
FAQ
Can hard money loans be refinanced?
Can you convert a hard money loan to a conventional loan?
What happens if you default on a hard money loan?
How do I refinance a hard money loan?
In order to refinance a hard money loan, you need to find new lenders and understand your current terms. You also want to prepare a detailed application for each potential lender. This is so they know all of the important information about your property.
When should I refinance my hard money loan?
You should apply for refinancing a hard money loan 45-60 days before the one-year mark to meet the seasoning requirement and close as soon as possible. However, if your hard money loan has a six- or nine-month term, you may need to consider a no-cash refinance.
What happens if you refinance a hard money loan?
Say you owe $185,000 at 15% per annum on a 2-year hard money loan. If you refinance the loan, you’d still owe $185,000, but you may secure a lower interest rate or a larger repayment window. Cash-out refinancing replaces your existing loan with a larger liability.
What is a hard money loan?
A hard money loan is a type of financing used by entrepreneurs who don’t qualify for conventional financing to purchase unique property or find traditional commercial loan limits too low for their needs. Hard money lenders are private investors or companies that deal specifically with this type of lending.