How can you refinance a hard money loan?

Refinancing a Hard Money Loan

Is your hard money loan starting to feel like a financial burden? High interest rates and balloon payments can hurt your property’s profits.

This article will explore a powerful strategy to refinance your hard money loan to a conventional loan. This can enhance your investment strategy and lead to higher returns. Let’s dive in!

Why Need to Refinance a Loan?

Refinancing from a hard money loan to a conventional loan can be a game-changer for real estate investors who want to keep the property. Here’s why:

Lower Rates: Hard money loans are fast and flexible but often have high interest rates. Refinancing to a conventional loan can cut your interest payments. This will save you money in the long run.

Improved Cash Flow: Lower interest rates mean lower monthly payments. This frees up cash to reinvest in your real estate portfolio.

Build Long-Term Wealth: Conventional loans usually have longer terms than hard money loans. They are stable and predictable for long-term investment properties.

Enhanced Credit Profile: Refinancing a conventional loan shows your financial responsibility.

Pros and Cons of Hard Money vs Conventional Loans

Feature

Hard Money Loans

Conventional Mortgage Loans

Interest Rate

Higher (8% - 15%)

Lower (6.68 - 6.89%)

Use

Property flips, bridge loans, investments

Primary residences, long-term investments

Credit Score

Less important

Very important

Term Length

Shorter (6 - 24 months)

Longer (15 - 30 years)

Speed

Faster

Slower

Requirement

Less stringent

Stricter

Down Payment

Higher (20% or more)

Lower (3% - 20%)

Mortgage Insurance

Not required

Typically required for loans with less than 20% down payment

LTV

Lower (65% - 75%)

Higher (up to 97%)

Qualify For Refinancing Conventional After Using a Hard Money Loan

This document outlines the requirements to refinance from a hard money loan to a conventional loan. Lenders will assess both your financial standing and the property itself. Here’s a breakdown of the key qualifying factors:

Financial Requirements

Credit Score:

Traditional lenders typically need higher credit than hard money lenders. Aim for a score of 620 or higher, though a higher score can unlock better interest rates and terms.

Debt-to-Income Ratio:

To calculate your DTI, divide your total monthly debt by your gross monthly income. A DTI under 50% is usually fine for conventional loans.

However, the limit can vary depending on the lender and other factors. Some lenders prefer a DTI below 43%, while others allow up to 50%.

Proof of Income:

Be ready to show documents that verify your income. This includes tax returns, pay stubs, and bank statements. Consistent and reliable income strengthens your loan application.

Down Payment:

Conventional loans require a 3% down payment percent of the sales price. However, the required down payment can vary depending on the loan type, borrower traits, and lender rules.

A 3% down payment is often intended for first-time homebuyers who buy a single-family residence. For other types of borrowers, the interest rate can be higher.

Private Mortgage Insurance (PMI):

For conventional loans, PMI is required if the down payment is under 20%. It varies by loan type and your borrower’s credit. It is usually rolled into your monthly mortgage payment.

Property Requirements

Appraisal:

The property will be appraised to determine its fair market value. This ensures the property’s value aligns with the loan amount.

Rental History:

If you’re refinancing a rental property, provide a history of successful tenant occupancy. This signals a stable investment to lenders.

Property Condition:

The property must be in good condition. It should meet all building codes and safety standards.

Seasoning:

Lenders prefer you to own the property for at least six months. This demonstrates stability and commitment to the investment.

When borrowers refinance a hard money loan?

After Rehab: If you’re flipping properties, refinance loans after your renovations. This will increase the property’s value. It allows you to leverage the improved value for better loan terms.

Stabilized Rental Income: Refinance after you have steady rental income from your properties. This demonstrates financial stability to lenders.

Favorable Market Conditions: Refinance when rates are low and the market is good. This can lead to significant savings over the life of the loan.

What if you’re denied?

1. Understand the reasons for denial

Lenders are required to provide specific reasons for denying your application. Carefully review the denial letter to understand where you fell short.

Common reasons include bad credit, a high DTI, and no seasoning (ownership history). Also, low property values and unstable.

2. Address the issues

To improve your credit, pay off the loan, and dispute errors on your credit report. And make timely payments to all your accounts.

Debt to Income Ratio: Reduce your debt or increase your income to improve your DTI.

Seasoning: If you lack it, wait a few months. Then, make consistent, on-time payments on your hard money loan.

Property Value: Consider improving your property to raise its value. Or wait for the market to appreciate it.

Income: Show proof of stable income or find ways to boost your rental income.

3. Explore alternative options

Non-QM Loans: Non-qualified mortgage (Non-QM) loans have looser requirements than conventional loans.

Private Money Lenders: Check private or hard money lenders for different criteria.

Loan Modification: Talk to your hard money lender about modifying your loan. This may extend the term or adjust the interest rate.

Sell the Property: If refinancing is hard, consider selling the property. It may help you recover your investment and move on to new opportunities.

4. Seek professional guidance

Consult a mortgage broker or financial advisor. They can give you advice and help you with refinancing.

Frequently Asked Questions

What are the hidden costs associated with refinancing a hard money loan?

Besides closing costs, watch for prepayment penalties on hard money loans. Also, check for appraisal and legal fees from the refinance.

How much equity do I need to refinance from a hard money loan?

While it varies, lenders often require at least 25 – 35% equity in the property. This means your loan-to-value ratio (LTV) should be 65 – 75% or lower to qualify for a conventional loan.

How long does it take to refinance a hard money loan into a conventional loan?

Like a standard mortgage, the process often takes 30 to 60 days. This includes appraisal, underwriting, and closing.

Can I refinance a hard money loan on a rental property?

Absolutely. Rental property investors often refinance into a conventional loan. It gets a lower rate and long-term financing after they rehabilitate the property.

Can you refinance a hard money loan with a low credit?

While it’s more challenging, some lenders specialize in borrowers with less-than-perfect credit. Be prepared for potentially higher rates or stricter requirements.

Publish: December 20, 2024 | Last Update: February 5, 2025
Sandy Yuen

Sandy Yuen is a certified mortgage broker. In 20 years of hard money lending, she’s funded over $450 million for investors. She specializes in fix-and-flip, bridge, and construction loans.

She also funds projects like second homes, apartments, and commercial and shopping centers. Sandy, a trusted lender, served over 500 clients in Irvine, CA. She is known for her fast approvals, flexible rates, and high transparency.

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