refinance hard money loan to conventional

Refinancing a Hard Money Loan into a Conventional Mortgage

Hard money loans serve an important purpose in real estate investing by providing quick financing to purchase and rehab properties. However their high interest rates and short repayment terms make them unsuitable for long-term financing. At some point, most real estate investors will want to refinance their hard money loan into a conventional mortgage. This allows them to lock in a lower fixed interest rate and pay off the loan over 15-30 years.

What is a Hard Money Loan?

A hard money loan, also known as a private money loan, is a short-term loan issued by private investors rather than banks or mortgage lenders. Hard money loans are easier to obtain than conventional mortgages because they don’t require lengthy underwriting. However, they come with higher interest rates and fees.

Key features of hard money loans

• Interest rates from 8% to 15%
• Loan terms of 6 months to 3 years
• Low down payments, often around 10%
• Fast closing, sometimes within days
• Few borrower requirements – lower credit scores and income accepted
• Used for real estate investment properties

Hard money serves a purpose when trying to act quickly on a deal or if you can’t qualify for a conventional loan. But long-term, it’s usually better to switch to conventional financing

When to Refinance from Hard Money to Conventional

Most real estate investors plan to refinance their hard money loan into a conventional mortgage once the property has been rehabbed and seasonably requirements are met. There are several reasons for doing this:

• Lower interest rate – Conventional rates are currently around 5%, much lower than hard money rates. This significantly reduces your monthly payments.

• Longer repayment term – Hard money loans usually have to be paid back within 1-3 years. With a conventional 30-year fixed mortgage, you have decades to repay the loan.

• Increased cash flow – The lower rate and payments free up more rental income to use for other investments.

• Build equity – More of your payment goes toward the principal with conventional financing, helping you build equity faster.

• Avoid balloon payment – Hard money loans often have a large balloon payment due at maturity. Refinancing avoids the need for this lump sum payment.

Overall, switching to conventional financing makes owning and profiting from investment properties much more sustainable in the long run.

Refinancing Requirements and Process

To qualify for a conventional refinance of your hard money loan, you’ll need to meet similar requirements as when purchasing a property conventionally:

• At least 20% equity in the property – A higher down payment generally allows you to avoid private mortgage insurance (PMI).

• Credit score of 620+

• Total debt-to-income ratio under 45%

• Sufficient income documentation – Tax returns, W-2s, and paystubs to verify your income. Rental income can also be used to qualify if documented adequately.

• Appraisal confirming the property value supports the loan amount

Additionally, Fannie Mae and Freddie Mac have seasoning requirements before they will refinance a mortgage:

• At least one borrower must be on title for 6 months for a cash-out refinance

• No waiting period for a rate-and-term refinance as long as you only pay off the loan used to acquire the property

The refinancing process is similar to getting a purchase mortgage:

1. Determine your new loan amount and cash needed to close. Seek pre-approval from a lender.

2. Complete your full application with income/asset documentation. Your credit will be run and appraisal ordered.

3. After approval, your loan will go through underwriting then closing. The new lender pays off the hard money loan.

4. You make payments on the conventional loan based on the agreed upon interest rate and term.

It’s best to start the refinancing process 60-90 days before your hard money loan matures. This ensures you aren’t forced into a higher rate loan extension or massive balloon payment.

Alternatives if You Can’t Qualify for Conventional Refinance

Some real estate investors may not meet the requirements to refinance into a conventional mortgage. Here are some alternatives to consider if this happens:

• FHA refinance – Only requires a 580 credit score and 3.5% down. Not limited to owner-occupied properties.

• Extend your hard money loan – See if you can push the maturity date back 6-12 months while you season the loan and improve your financial profile.

• Take out a second mortgage – Use a second lien on another property you own to pay off the hard money loan.

• Partner with an equity partner – Bring in a partner with better credit/income to qualify and split proceeds.

• Sell the property – If all else fails, you may need to sell the asset, pay back the hard money loan, and keep the profits.

• Rent out the property – Become a landlord instead of flipping if you can’t refinance into your name. Manage the property carefully until you rebuild your credit.

Proceeding with caution is recommended if you are unable to refinance your hard money loan conventionally. Work on improving your financial position so you can qualify for better financing options in the future.

What is a Conventional Mortgage Loan?

Since we’ve discussed them extensively already, let’s clearly define what makes a loan “conventional” and who offers these mortgages:

• Must meet standards to be purchased by Fannie Mae or Freddie Mac. Referred to as “conforming loans”.

• Typically issued by banks, credit unions, or mortgage lenders rather than private investors.

• Have strict underwriting requirements related to borrower credit, income, assets, and property condition.

• Feature a fixed interest rate and full amortization over 15 or 30 years.

• No prepayment penalties; extra payments directly reduce principal balance.

• Low down payments possible for owner-occupied primary residences or second homes. 20% down often required for investment properties.

• Interest rates driven by 10-year Treasury yields and housing market factors. Currently around 5% for 30-year fixed mortgages.

Should I Refinance My Hard Money Loan?

If you currently have a hard money loan, here are some key questions to ask when deciding if you should refinance into a conventional mortgage:

• How close is the maturity date? When must the loan be paid off? Refinancing takes 45-90 days on average.

• What is my current interest rate compared to current conventional rates? Is there room to significantly lower my payments?

• Do I meet all requirements for a conventional loan, like credit score minimums? If not, how long will it take to improve my financial profile?

• How much equity do I have in the property? Will I avoid PMI with a 20% down payment?

• Are there prepayment penalties or will I lose favorable terms on my hard money loan? Make sure benefits outweigh refi costs.

• How long do I plan to hold the property? Conventional loans build equity faster but have higher closing costs.

Running the numbers to see potential monthly savings is crucial. Closing costs can often be rolled into your new loan amount as well.

Refinancing from hard money to conventional requires some patience and planning. But for real estate investors who plan to buy and hold properties long term, it almost always makes good financial sense. Be sure to select a reputable lender who can walk you through the process and help determine the optimal loan program.

Key Takeaways:

• Hard money loans provide quick financing but have high rates and short terms. They serve a purpose for real estate investors.

• Most investors plan to refinance into a conventional mortgage once their property has seasoned and they’ve built enough equity.

• Refinancing requirements are similar to purchasing a property conventionally – good credit, income docs, 20% equity. Meet seasoning rules too.

• Look into FHA, a second mortgage, extending your hard money loan, bringing on a partner, or selling the property if you can’t qualify for conventional refinancing.

• Conventional loans have strict underwriting but feature predictable payments, fixed low rates, and 30-year amortization. Great for long-term rentals.

• Crunch the numbers to see potential savings and make sure benefits outweigh refinancing costs before switching loans.