Hard money loans can be a real estate investor’s best friend. 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.
How to qualify for refinancing
Before 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.
1. Financial requirements
Refinancing a hard money loan can be more involved than refinancing conventional mortgage loans — especially if you want to refinance a hard money loan with a conventional mortgage.
In that case, you’ll have to go through the entire mortgage process just as you would for buying a new property. That includes meeting your lender’s requirements for credit scores, debt-to-income ratio (DTI), proof of income, employment history — the whole ordeal.
If you originally used a hard money loan because you didn’t meet conventional loan requirements, this can be a problem. Fortunately, some refinancing options have fewer requirements than others.
Lastly, your new lender will want to see the payment history on your hard money loan. If you have a history of late payments, your odds of approval go down the drain.
2. Property requirements
Even if your finances check out, you’re still not in the clear.
The property itself must also qualify for the type of loan you’re applying for. In most cases, that means it can’t be under construction. 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.
How to refinance hard money loans
The three most common ways to refinance a hard money loan are:
- 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 loans
As 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.
Pros:
- Lower interest rates for those with a strong credit history
Cons:
- Strict property and borrower requirements
- More paperwork
- Longer process
Rental loans
Rental loans are long-term loans designed specifically for real estate investors. They attempt to solve all the problems associated with conventional and government-backed loans.
- 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 BRRRR method, some hard money lenders can even bundle together a short-term bridge loan with a cash-out refinance into a rental loan. These types of programs save you money on fees and often offer additional incentives.
Requirements vary by lender, but at Longleaf, we like to see:
- 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.
Pros:
- 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
Cons:
- Slightly higher interest rates
If you’re interested in refinancing a hard money loan into a rental loan, we can help. Longleaf rental loans have the most competitive rates in the market, and we can build a custom loan product specific to your needs.
FAQs
Yes, you can refinance a hard money loan with either a traditional lender or another hard money lender. That said, many borrowers choose to refinance their hard money loans with traditional lenders to secure long-term financing. Hard money loans are excellent for investors who want to quickly secure a real estate deal.
What score do you need for a cash-out refinance? ›
Most lenders require you to have a credit score of at least 580 to qualify for a refinance and 620 to take cash out. If your score is low, you may want to focus on improving it before you apply or explore ways to refinance with bad credit.
How do you explain a cash-out refinance? ›
A cash-out refinance is a type of mortgage refinance loan that allows you to tap some of the equity in your home if you need extra cash. You may consider it if you want to consolidate debt, finance home renovations or pay for other large expenses.
Can you negotiate with hard money lenders? ›
Once you've narrowed down your options, you can start negotiating the terms of your hard money loan. The main terms you want to focus on are the interest rate, the points, the fees, the term, the prepayment penalty, and the draw schedule.
How do you pay off a hard money loan? ›
Using the proceeds from selling your investment property is one of the most common repayment methods for hard money loans. Generally, hard money loans allow investors to purchase run-down properties quickly. Then, after an investor increases the property's value through repairs, they can sell it for profit.
What can I use as collateral for a hard money loan? ›
Types of Collateral Accepted for Hard Money Loans:
Real Estate: Real estate is one of the most common types of collateral accepted for hard money loans. This can include residential properties, commercial buildings, vacant land, or even multifamily units.
Can you get denied for a cash-out refinance? ›
For example, you typically must have at least 20% in equity in your home to get a cash-out refinance and if you don't your refinance could be denied. A no cash-out refinance can be denied if you do not have a good credit history or enough income to meet the lender's criteria.
Is it hard to get approved for a cash-out refinance? ›
Determining whether you qualify: Many cash-out refinance lenders require a credit score of at least 620 and at least 20 percent equity in your home. You might find lenders with looser requirements, but you could pay a higher rate as a result.
What is the max cash-out refinance? ›
For a conventional cash-out refinance, you can take out a new loan for up to 80% of the value of your home. Lenders refer to this percentage as your “loan-to-value ratio” or LTV.
What is the downside of a cash-out refinance? ›
Cash-out refinance cons
You owe more: Because you're taking out a larger loan amount, your overall debt load increases. No matter how close you were to paying off your original mortgage, the cash-out raises your debt level.
Keeping the maximum 80% LTV ratio requirement in mind, you may borrow up to an additional $60,000 with a cash-out refinance. To calculate this, multiply your home's value by 80% ($450,000 x 0.80 = $360,000) and subtract your outstanding loan balance from that amount ($360,000 – $100,000 = $60,000).
How much equity do I need to refinance? ›
How much equity should I have? Refinance requirements can differ depending on the lender, type of loan you have and your personal circ*mstances but having 20% equity in your home is typically advised for conventional mortgages. Refinancing with at least 20% equity can help you avoid mortgage insurance payments.
How do I write an offer on a hard money loan? ›
How to Write a Cash Offer Using Hard Money
- Get pre approved by a hard money lender.
- Identify the property you want to purchase.
- Submit your offer to purchase and write on the offer, “cash and hard money.” There is no financing or appraisal deadline. ...
- Step 1: Get a proof of funds letter from the chosen hard money lender.
Hard money loans are risky. This is primarily because they come with higher interest rates and shorter repayment terms, and they have limited regulations compared to typical mortgages. This means that you, as the borrower, would have very little protection or options if you needed help repaying the loan.
How do I prepare for a hard money lender? ›
All hard money loans require some individual application information, including:
- Application: You'll provide all your personal information. ...
- Borrower's Authorization: ...
- Photo ID: ...
- Two Months Bank Statements: ...
- Credit Report: ...
- Background Check:
The majority of hard money loans do require a personal guarantee from the property owner (or, occasionally, from other individuals who are connected with the property or the owner and who greater personal net worth than the property owner).
Can you write off hard money loans? ›
If you want to enjoy interest tax deductible on your hard money loan, you must use it for investment purposes. In essence, the investment must be for business purposes, such as buying a property for commercial use or reselling. You won't enjoy the same benefit when the use is personal.
Does hard money loan go on credit? ›
In general, hard money lenders and private lenders do not report to the credit bureaus. Any organization, like banks and lenders, wishing to report customers' payment records to the bureaus has to pay each bureau for the reporting. As with any data service, the cost per report decreases with more reporting.
How hard is it to get a cash-out refinance? ›
Determining whether you qualify: Many cash-out refinance lenders require a credit score of at least 620 and at least 20 percent equity in your home. You might find lenders with looser requirements, but you could pay a higher rate as a result.
