A hard money loan is a real estate investor’s greatest tool. Unlike a traditional mortgage or loan, it’s faster, more flexible, and you don’t have to jump through as many hoops. Without them, building wealth as an REI is far more challenging.
Eventually, though, you might want to replace it with a longer-term loan. For example, if you want to turn an investment property into a rental, refinancing a hard money loan can help set you up for long-term success.
However, the process isn’t always as straightforward as it may seem, so let’s take a look at how to refinance a hard money loan.
The Benefits of Hard Money in Real Estate Investing
When you work in a competitive real estate market, it’s important to have access to funds quickly. You may hear people say that cash is king. However, many real estate investors know that it’s not always necessary.
When investors use hard money, there are several benefits.
- First, it allows investors without “cash in hand” to purchase a property and fund their flip. As such, they are able to compete with local or national cash buyers.
- Second, the flexibility and speed make it much easier to act on an opportunity because you don’t have to wait for traditional loan processes.
While these loans are great for investors, it’s important to remember that they are short-term loans, lasting 1-2 years at most. If you want to sell the property, you can pay off the loan and pocket the profits.
However, if you have a different exit strategy, refinancing that loan may help you with a longer-term plan.
Why Refinance an Investment Property?
So, how can you refinance hard money loans to use a different investment strategy? Let’s take a look at an example.
REI Ian wanted to sell a property at a profit and pay off their loan. Why would Ian choose a different exit? Well, there are many reasons and many options.
If Ian feels that the market is volatile, he might choose to keep the property. Refinancing a hard money loan can help him hold onto that property without the short-term restrictions.
Alternatively, Ian might choose to convert the property into a rental for a passive income. He could refinance the property, pay back the loan, and rent the property out to build up his income.
That’s actually part of how the BRRRR method works. This method uses the best benefits from other investment strategies and combines them into a single, ongoing technique.
How to Qualify for Refinancing
Before you look at how to refinance a hard money loan, it’s important to understand the requirements. While the precise requirements depend on the loan you choose, it really breaks down into two metrics.
Refinancing hard money loans may involve more work than a conventional mortgage loan. This is especially true if you choose to refinance hard money with a traditional loan.
If that’s the case, you would go through the mortgage process, as you might for buying a new property. That includes the bank’s requirements for credit scores, income, employment history, etc.
If you used a hard money loan because these requirements were a hurdle, that may be a problem. However, some refinancing options don’t have as many requirements.
Additionally, the new lender will ask to see the payment history on the hard money loan. Any history of late payments will make it harder to get approval.
If your finances check out, you have to ensure the property qualifies as well. Generally, that means it needs to be ready to rent, not in the middle of renovations.
Additionally, most lenders only allow you to refinance seasoned rental properties. That means you may need to wait six months or so to build equity.
Can You Refinance a Hard Money Loan?
Yes, you can refinance a hard money loan. However, there are parts of the process that may make it more difficult. Overall the process is similar to refinancing any type of mortgage. You just have to understand the terms and conditions.
How to Refinance Hard Money Loans
These are the three most common ways to refinance hard money loans.
- Traditional bank loans
- Government-backed loans
- Long-term rental loans
There are unique advantages and disadvantages to each.
Traditional Bank Loans
As mentioned above, to use a conventional loan, you have to meet the usual requirements. These vary between banks, but these are the common requirements.
- Mortgage insurance: required if under 20% equity
- Minimum equity: 20% for cash refinancing or as low as 5% for rate-and-term
- Credit score: Over 620 for many banks
- Debt to income ratio: Under 50%
- Seasoning for cash refinancing: Six months is standard but varies by state and lender
Again, these are not set in stone and will vary by lender and your specific financial situation. However, it can be challenging to refinance hard money loans with a conventional loan.
Rental Property Loans
Rental loans are a long-term loan specifically designed for real estate investors. The purpose is to resolve the issues involved in conventional loans.
- Secure funding faster
- Looks at property as an investment instead of your personal qualifications
- May be able to waive “seasoning” if you have a signed lease
If you plan to follow the BRRRR method, some lenders can help you with a more personalized solution. For example, they might bundle a short-term bridge loan with your refinancing into a rental loan. This can save you money on fees while providing different incentives.
Rental loan rates won’t be as low as traditional loans, but the benefits may be worth it.
Ready to Refinance?
So, the bottom line is that yes, you can refinance hard money loans. In fast, doing so may be your best option. It all depends on your specific situation.
If you have questions about your loan or how to handle a rental property investment, please reach out to the team at King James Lending. As your partner, we are here to help you grow.