Refinancing a hard money loan can be a complex process, but it can also provide many potential benefits. This guide provides an overview of key terms, costs and considerations to help you understand the refinancing process and decide if it is the right move for you.
Why Refinance a Hard Money Loan?
Refinancing a hard money loan can be a great way to reduce monthly payments, access lower interest rates and terms, and gain more flexibility for managing cash flow. It can also help you free up capital for reinvestment or when you need the funds at short notice. If done correctly, refinancing a hard money loan could potentially make it easier to pay off debt faster than if the loan had not been refinanced.
Hard money loans can be a real estate investor’s best friend and the road to real estate wealth and success.
Unlike traditional loans, they’re fast, flexible, and free of hoops to jump through.
Without them, building wealth through real estate would be much more challenging.
But there’s a time and a place for everything. And eventually, a hard money loan must be replaced with a longer-term solution.
If you plan on holding onto a property and renting it out, that solution is refinancing.
Unfortunately, this isn’t always a straightforward process, so in this guide, we’ll look at how to refinance a hard money loan.
Let’s dive in and explain everything you need to know about refinancing a hard money loan.
How To Qualify
A. What are the Financial requirements
Refinancing a hard money loan is thankfully not as involved as refinancing conventional mortgage loan —There are many options from conventional to “investment” private equity loans or what in some circles is called a DSCR loan (Debt Service Coverage Loan.)
In the case of a conventional “Bank” loan, you’ll go through a more conventional mortgage loan process similar to purchasing a new property. The conventional method includes meeting the requirements for credit scores, proof of income, debt-to-income ratio (DTI Ratio), employment history and time.
If you originally financed your property using a hard money loan because you didn’t meet conventional loan requirements, you will have the same issues refinancing using a conventional loan. Fortunately, there are numerous options to help you refinance your investment property.
One note, your refinance lender will want to see your current mortgage statement and a 12 month history of loan payments. If you have late payments or missed payments, your odds of approval are minimized. There are some situations where exceptions can be made, but each exception makes the loan more difficult.
B. What are the Property requirements
The real estate itself must also qualify for the loan program that you are looking to apply for. For example, if you are looking to refinance your hard money fix and flip loan, the property needs to be “rent ready”. Kitchens, Bathrooms, running water, all working.
Not only that, but if you are looking for cash out refinancing, you may need a few months or more of “seasoning”. Some credit lines require 6 months of rental income other loan products allow you to refinance immediately.
Through every market turn, there are always exceptions to many of the rules so bring up your concerns to your lending professional.
How to refinance hard money loans
Historically, the three most common ways to refinance a hard money loan were with a:
- Long-term rental loan
- Conventional bank loan
- Government-backed loan
Each has advantages and disadvantages, so let’s take a look.
Refinancing with a Conventional bank loan
As previously mentioned, refinancing with a conventional loan, will need you to meet all the conventional requirements. These are full document loans that require stringent due diligence.
- There is a minimum equity requirement of 20% for a cash-out refinance; as little as 5% for rate-and-term refinance
- Mortgage insurance: Required if less than 20% equity
- Credit score: > 660 in most cases
- DTI: < 50%
- 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 or tax returns.
Again, these rules aren’t the same from loan product to loan product. But in most cases, refinancing a hard money loan with a conventional bank mortgage has the most rigid underwriting guidelines.
Be sure you have all your ducks in a row prior to applying for a conventional loan. If anything goes wrong, you will have to change lenders when time becomes more critical.
Better options for Refinancing and Growing your real estate wealth
Refinance Investment Loans
Refinancing a hard money loan with a “rental loan”. A rental loan utilizes private equity and institutional funds to efficiently refinance your investment property. Some call these DSCR Loans (Debt Service Coverage Ratio Loans). I like to keep these 2 products separate. They may serve the same purpose but some refinance loans require a No DSCR loan or a property that has no tenants yet.
Investment loans are primarily concerned with the value of the asset they are financing. The lower the LTV (Loan to value) the less stringent the personal requirements (FICO, income, experience).
Investment Loan Requirements
- Credit score: > FICO of 600 in most cases. You will have more options with a 660+ FICO
- Cash Out up to 80%
- No Tax Returns or Income required.
There is a real estate investment wealth building program called BRRRR (Buy, Rehab, Rent, Refinance, Repeat). There are lenders/credit lines that specifically look to help professional investors finance and refinance utilizing this formula. For more information or specific questions on this series “Everything you need to know about refinancing a hard money loan or for a free copy of our BRRRR Program call 800-826-5077
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