Refinancing Hard Money Loans – How to refinance a Hard Money Loan

Refinancing a hard money loan will be a way for you to get into conventional, government backed and longer term loans. 

You will need to be able to qualify with the lender you choose to work with. Refinancing hard money loans can be a great way to save money and improve your financial situation. By replacing high-interest loans with lower ones, you can reduce your monthly payments and potentially save thousands of dollars in interest over time. Let’s cover the basics of refinancing hard money loans and get you some money saving tips on how to get the best deal.

What Are Hard Money Loans?

Hard money loans are short-term, high-interest loans that are typically used by real estate investors to finance the purchase or renovation of a property. Building from the ground up will make hard money loans a great option for some builders. 

Unlike traditional bank loans, hard money loans are often funded by private investors or lending companies, and are based on the value of the property rather than the borrower’s creditworthiness. Due to them being riskier for the lender, hard money loans usually have higher interest rates and fees when compared to traditional loans. 

However, they can be a valuable source of financing for investors who need to move quickly on a deal or who have poor credit or limited options for funding. Hard money loans are usually secured by the property being purchased, which means that if the borrower defaults on the loan, the lender can seize the property to recover their investment.

Considerations for Refinancing a Hard Money Loan

When considering refinancing a hard money loan, there are several important factors to take into account:

1. Interest Rates: Compare the interest rate on your current hard money loan to the interest rates offered by other lenders. If you can get a lower interest rate, refinancing could save you money in the long run.
2. Fees: Check the fees associated with refinancing, including closing costs and any prepayment penalties on your current loan. Make sure that the fees don’t outweigh the potential savings. Don’t guess on this, write each scenario out and compare.
3. Credit Score: Your credit score may have improved since you first took out the hard money loan. A higher credit score can help you qualify for lower interest rates and better loan terms.
4. Equity: The amount of equity you have in the property can impact your ability to refinance. Lenders will typically require a certain amount of equity in the property to qualify for a refinance.
5. Loan Terms: Consider the length of the loan and the monthly payment. A longer loan term can lower your monthly payment, but may also result in paying more interest over time.
6. Exit Strategy: Have a clear plan for how you will repay the loan, whether it be through selling the property or refinancing again in the future. A solid exit strategy can give lenders confidence in your ability to repay the loan.

Watch Out For Seasoning Requirements

Seasoning requirements are guidelines set by lenders that dictate how long a borrower must wait before they can refinance a property that was purchased with a hard money loan. The purpose of seasoning requirements is to prevent borrowers from quickly flipping properties for a profit, which can be a risky investment strategy.

Borrowers should watch out for seasoning requirements when considering refinancing a hard money loan because they can limit the borrower’s options and delay the refinancing process. For example, some lenders may require a borrower to hold onto the property for a certain length of time, such as six months or a year, before they can refinance. This can be problematic if the borrower needs to access the equity in the property sooner. Overall this means you will have to hold the hard money loan for the period of time the lender makes you agree to, this can sometimes delay the sale and or contribute to you losing a buyer.

It’s important for borrowers to understand the seasoning requirements of their current loan and any potential new lenders before committing to a refinance. They should also consider how long they plan to hold onto the property and factor in any potential delays in the refinancing process. By doing so, they can make an informed decision and avoid any unnecessary complications or delays.

Know Your Budget

Knowing your budget is crucial because it helps you understand how much money you can afford to spend or borrow, and avoid overspending or getting into debt. When you have a clear understanding of your income, expenses, and financial obligations, you can make informed decisions about your finances and avoid taking on more debt than you can handle.

Knowing how much you will need to pay monthly and when there will be adjustments made for payment is very important. By analyzing your income and expenses, you can calculate your debt-to-income ratio, which lenders use to evaluate your ability to repay a loan. This can help you avoid taking on a loan that is too large or too expensive for your current financial situation.

Knowing your budget can also help you identify areas where you can cut expenses and save money. For example, you may discover that you’re spending too much on non-essential items like entertainment or dining out. By cutting back on these expenses, you can free up more money to put towards your loan payments or other financial goals.

Overall, knowing your budget is important because it helps you make informed decisions about your finances, avoid overspending, and stay on track towards achieving your financial goals.

Make sure the property is rent-ready

Making sure the property is rent-ready is an important step when refinancing a hard money loan because it can help you qualify for better loan terms and increase the property’s value. When a property is rent-ready, it means that it is in good condition and ready for tenants to move in without the need for major repairs or renovations.

From a lender’s perspective, a rent-ready property is less risky and more likely to generate income, which can improve the borrower’s chances of getting approved for a refinance. Additionally, a rent-ready property can increase the property’s value, which can lead to a higher appraisal and potentially better loan terms.

By making sure the property is rent-ready, you can also attract higher-quality tenants and command higher rental rates, which can increase your cash flow and make it easier to repay the refinanced loan. This can be especially important for real estate investors who rely on rental income to generate a return on their investment.

You Must Understand the following to Qualify to Refinance 

To qualify for a refinance of a hard money loan, borrowers typically need to meet certain requirements, including:

• Equity: Borrowers must have equity in the property they want to refinance. Most hard money lenders will not lend more than 70-80% of the property’s value.
• Credit score: While hard money lenders are primarily focused on the property value and the borrower’s ability to repay the loan, they may still consider the borrower’s credit score. A higher credit score can help borrowers qualify for better loan terms and lower interest rates.
• Income: Borrowers will need to demonstrate the ability to repay the loan. This may include providing proof of income, rental income, or other sources of income.
• Property condition: The property will need to be in good condition and meet certain standards set by the lender.
• Exit strategy: Borrowers will need to have a clear plan for how they will repay the loan, whether it be through selling the property, refinancing again in the future, or other means.
• Appraisal: Lenders may require an appraisal to determine the current value of the property.
• Seasoning requirements: Some lenders may require the property to have been owned for a certain period of time, known as seasoning requirements, before they will consider a refinance.

What are the Qualifications for Refinancing a Hard Money Loan & What Documents Will You Need?

To refinance a hard money loan, borrowers will typically need to provide the following documents:

1. Property information: This includes information about the property, such as the address, square footage, and property type.
2. Loan information: Borrowers will need to provide information about the existing hard money loan, including the original loan amount, interest rate, and payment terms.
3. Proof of ownership: Borrowers will need to provide proof of ownership of the property they want to refinance. This may include a copy of the title or deed.
4. Income documentation: Borrowers will need to provide proof of income, such as tax returns, pay stubs, or bank statements.
5. Rental income: If the property generates rental income, borrowers will need to provide documentation of the rental income, such as lease agreements or rent rolls.
6. Credit history: While hard money lenders primarily focus on the value of the property and the borrower’s ability to repay the loan, they may still consider the borrower’s credit history. Borrowers may need to provide credit reports or other documentation related to their credit history.
7. Appraisal: Lenders may require an appraisal to determine the current value of the property.
8. Other financial documents: Borrowers may need to provide other financial documents, such as tax returns, bank statements, or proof of other assets.

The specific documents required may vary depending on the lender and the borrower’s individual circumstances. It’s best to check with the lender to determine the exact documentation required for refinancing a hard money loan.

Benefits of Hard Money Loan Refi

Refinancing a hard money loan can offer several benefits, including:

1. Lower interest rates: Refinancing a hard money loan can provide borrowers with access to lower interest rates, which can help lower monthly payments and save money over the life of the loan.
   
2. Longer loan terms: Hard money loans typically have shorter terms than traditional loans, which can make them more expensive to repay. Refinancing a hard money loan can provide borrowers with access to longer loan terms, which can help reduce monthly payments and make the loan more affordable.
   
3. Improved cash flow: By refinancing a hard money loan, borrowers may be able to reduce their monthly payments and improve their cash flow, which can help them better manage their finances.
4. Access to more favorable loan terms: Refinancing a hard money loan can provide borrowers with access to more favorable loan terms, such as lower fees and fewer penalties.
   
5. Opportunity to improve credit score: By refinancing a hard money loan, borrowers may be able to improve their credit score by making timely payments and reducing their overall debt load.
6. Opportunity to use the property for other purposes: Refinancing a hard money loan can provide borrowers with the opportunity to use the property for other purposes, such as renting it out or using it as collateral for another loan.

Remember it is very important to carefully consider the costs and benefits of refinancing and work with a reputable lender to ensure the best possible outcome.

Cash Out Refinance Hard Money Loan

A cash-out refinance hard money loan is a type of loan where the borrower refinances an existing hard money loan and takes out additional funds in excess of the amount needed to pay off the original loan. In other words, the borrower receives cash back at closing.

The cash-out refinance process involves the borrower taking out a new hard money loan, which pays off the existing loan and provides additional funds in the form of cash back. The borrower can then use the cash for any purpose, such as funding renovations, paying off other debts, or investing in other properties.

Cash-out refinance hard money loans typically have significantly higher interest rates and fees than traditional loans, as the lender is taking on more risk by lending additional funds. 

Cash-Out Refinance Hard Money Rates

The cash-out refinance hard money rates can vary depending on a variety of factors, such as the lender, the borrower’s credit score, the property value, and the loan amount. Generally, hard money loans have higher interest rates than traditional loans due to the increased risk to the lender.

In the case of a cash-out refinance, the interest rate may be even higher than a traditional hard money loan, as the borrower is taking out additional funds on top of the existing loan. The interest rate for a cash-out refinance hard money loan could range anywhere from 8% to 18% or higher, depending on the lender and the borrower’s specific situation.

In addition to the interest rate, borrowers may also be required to pay additional fees and charges, such as origination fees, closing costs, and prepayment penalties. It’s important for borrowers to carefully review and compare loan offers from multiple lenders to find the best possible loan terms and rates. Borrowers should also work with a reputable lender who can provide transparency and guidance throughout the loan process.

Who should refinance with a hard money lender?

Refinancing with a hard money lender may be a good option for borrowers who are looking for short-term financing and have difficulty qualifying for traditional loans. Here are some situations where refinancing with a hard money lender may be a good choice for a borrower to consider:

1. Real estate investors: Hard money loans are often used by real estate investors who need quick financing for a property purchase, renovation, or flip. Refinancing with a hard money lender can help investors access additional funds to continue their investment projects.
2. Borrowers with poor credit: Hard money lenders are primarily concerned with the equity in the property, rather than the borrower’s credit score or income. This makes it easier for borrowers with poor credit to qualify for a loan.
3. Borrowers who need quick funding: Hard money lenders can often fund loans much faster than traditional lenders, which can be an advantage for borrowers who need quick access to funds.
4. Borrowers who don’t qualify for traditional loans: Hard money lenders may be more willing to work with borrowers who don’t meet the strict qualification requirements of traditional lenders.
5. Borrowers who need short-term financing: Hard money loans typically have shorter terms than traditional loans, making them a good option for borrowers who need short-term financing and plan to refinance or sell the property in the near future.

When it comes to starting investments or continuing to collect properties, hard money loans are a great resource to consider. Hard money loan terms should be studied by the borrower and this is one of the most important times in an investor’s career to READ THE SMALL PRINT, understand the terms of the loan! Using hard money when all considerations are taken into account can be just the leverage that one needs to seal the next deal! Happy property hunting! 

ADPI Pro Tips

• Shop around for the best rates: Hard money lenders can have different rates and terms, so it’s important to shop around and compare offers from multiple lenders to find the best possible loan terms.
• Check seasoning requirements: Some hard money lenders have seasoning requirements that may prevent borrowers from refinancing too soon after taking out the original loan. It’s important to check with the lender to make sure you meet any seasoning requirements before applying for a refinance. Ask yourself: How do the seasoning requirements line up with my overall plan to sell or refinance this property?

This blog was written in collaboration with our absolutely amazing DoD SkillBridge employee: Joe