Posted by Tiffany Yang ● Feb 6, 2020 9:00:00 AM
What to Consider When Refinancing Your Hard Money Loan
At Visio Lending, we pride ourselves on our fast, simple, and dependable loan process, which enables investors to quickly grow their real estate portfolios. Investors often use hard-money loans to acquire and renovate properties. The Visio team often refinances these investors upon the expiration of their hard-money loans into long-term, lower cost, permanent financing so the investors can hold their properties as income-generating rental properties. Sometimes, the investors even receive cash-out upon refinancing. They use that cash-out towards their next investment property purchase.
If you’re considering using this strategy or you’re at the point of needing to refinance your hard money loan, consider these few suggestions from one of Visio’s top producing Account Executives, Tracy Gordon.
What is a hard money loan?
A hard money loan is a type of mortgage loan. There is no universal agreement on why they are called “hard money” loans, so let’s discuss their common features. Hard money loans typically have short terms such as 12 to 24 months and higher fees and interest rates. Hard money loans often include both purchase financing (to fund buying a property) and construction financing (to make improvements to the property) Most hard money lenders (those that make hard money loans) focus first and foremost on the value of the property put up as collateral for the loan.
They also care deeply about the experience of the investor and the investor’s business plan for the property. Some, maybe even most (but not all) hard money lenders these days look at the investor’s credit score and depth of credit. Although most hard money lenders are more lenient on credit than traditional mortgage lenders.
Hard money rates & fees
Why are hard money rates and fees higher? A few key reasons. First, the terms are so short that the only way the lender can cover the costs of making the loan is by charging higher fees and a higher interest rate. Second, because hard money loans often include construction financing, they tend to be higher risk than permanent financing on already stabilized properties. Finally, many hard money lenders have more flexible or lenient credit or underwriting requirements. For example, many local hard money lenders do not require full-blown appraisals if they are lending in their own city.
With that background in mind, let’s take a look at some of the items you should consider when refinancing a hard money loan.
Considerations for refinancing a hard money loan
So here are some of the gotchas that you may encounter when refinancing a hard money loan. You can avoid these by planning ahead.
Be credit conscious
Visio and other long-term lenders put a lot of focus on credit, including both your credit score as well as your depth of credit (number and length of tradelines). Do yourself a favor and take whatever steps you can to optimize your credit score before starting the refinancing process.
Be credit conscious (Part II)
Most hard money lenders do not report to the credit bureaus. This means that if you make late payments on your hard money loan, it very well may not negatively impact your credit score. However, late payments on your hard money loan still come back to bite you when you go to refinance.
As part of the refinancing process, your new lender will request a payoff from your hard money lender. That payoff likely will disclose if you’ve had late payments and/or late fees, which will then trigger a bunch of questions from your new lender and could easily kill your refinance. Our best advice is to make your hard money loan payments on time. If you need an extension, pay to get an extension. You’ll probably save yourself in the long run.
Make sure the property is rent-ready
You can shop around before your renovations are complete, but don’t start the actual refinance process until you’re done. Most permanent financiers, such as Visio, will not refinance properties that remain under construction. This even includes finishing work such as trim, interior doors, and paint.
Shorter seasoning to refinance
Okay, so what is ownership seasoning and why is it important for the refinancing process? Lenders are skeptical about rapid increases in property value. Let’s say you bought a property with a hard money loan. You think you got a good deal on the purchase, you used some of the loan proceeds to improve it, and now you want to refinance it. Your new lender is going to want to know your purchase price, the amount you invested in improving the property. This is referred to as the “total cost.” The lender then will look at the new appraised value and compare that amount to the total cost.
The lender will be asking themselves whether the deal makes common sense. If you paid $200k for the property and put $75k into it and it appraised for $325k five months later, that may make sense provided you’re in a good market where property values are stable to increasing. If in that same situation the new appraisal comes back at $400k, your lender may curtail your loan amount because you’ve only owned the property for five months.
This “seasoning” is a measure of how long you’ve owned the property. Some lenders also have internal rules that state that if you’ve owned the property less than one year, or nine months or six months, the maximum loan amount is limited to the lesser of your total cost or their max loan-to-value based on the appraised value.
Bonus Tip: Partner with an alternative lender
Agency and bank investor loans tend to be the most restrictive on credit, property condition, and seasoning. Alternative or private lenders, such as Visio, have more flexibility and focus exclusively on providing permanent financing on investment properties. These lenders can walk you through the various options you have to consider when refinancing your hard money loan, and tailor your new financing to your particular investment strategy.
How can Visio Lending help you decide what to do?
If you’re financing a rental property, there are many loan programs options available. Visio’s primary focus is providing 30-year financing to help buy and hold investors grow their rental portfolios. As described above, investors typically use hard money loans to purchase and renovate a property. Visio finances rent-ready rental properties that are 1-8 units, including mixed-use properties. Visio often partners with hard money lenders and their customers to provide permanent financing on any properties that investors choose to hold and rent rather than flip at the end of their hard money loan.
If your hard money lender also offers rental financing, you may be asking yourself whether you should just refinance with your hard money lender or work with a firm that specializes in rental financing? Great question. A few considerations. First, a rental loan specialist such as Visio Lending likely will be able to provide you with better refinancing terms than your local hard money lender. 30-year loans typically are refinanced in the bond market. You have to have significant scale to be able to finance in the bond market. Most hard money lenders do not have enough scale to be able to refinance in the bond market and therefore have to work through middlemen.
Get rid of the middleman
The introduction of middlemen into the process increases costs and uncertainty. Second, you may want to think twice about whether you want to have your construction loans and permanent loans with the same lender. The former is quite a bit riskier than the latter. If you have all of your loans with one lender, you may find that if you have difficulty on one of your construction loans it causes a cross-default on your rental loans. You can reduce that risk by using one lender for hard money construction loans and another for your long-term rental loans.
Visio Lending can help you refinance your hard money loan into a long-term loan with a lower rate for your rental properties. With great rates and features, and no middlemen, we can help you grow your real estate portfolio and achieve your financial goals. If you’re interested in learning more about Visio’s rental loan program or want to discuss details about our hard money loan refinancing program, feel free to get in touch with us.