Refinance Out of a Hard Money Loan Into Conventional

Hard money loans are great, but they come with short fuses. Quickly after you get them, you have to refinance out or pay stiff penalties.

After all, that’s the purpose of a hard money loan. You buy, fix up, and rent out the house. Hopefully, you have enough equity to refinance into a 30-year fixed conventional loan, then sit back and collect rent.

But what does it take to refinance a hard money loan into a conventional loan?

Do You Qualify For a Conventional Refinance?

Before getting a hard money loan, you should make sure you qualify for a conventional refinance. That is, unless you plan to sell the property.

A mistake would be to get a hard money loan just to find out that you can’t get into permanent financing later.

Here are the requirements:

• 620 credit score

• At least 5% equity in the property, but preferably 20% to avoid mortgage insurance

• A debt-to-income ratio below 45%

• You’re paying off mortgages used to acquire the property only, unless getting a cash-out refi

• No major property deficiencies

• Adequate cash to close if there's not enough equity to roll in closing costs

• Maximum loan of $766,550 in most of the U.S., but higher in high-cost areas

You’ll need to prove your current income. This will be easiest as a W-2 employee, but possible for self-employed individuals and full-time investors. If your income is hard to prove, see below for conventional loan alternatives.

Learn more about conventional requirements here.

Conventional Refinance Waiting Periods

Waiting periods could be your biggest hurdle.

No-cash-out (rate and term) conventional refinance: There is no seasoning requirement/waiting period if you are only paying off the loan(s) used to acquire the property. One owner must be on title when you apply for the refinance.

Cash-out refinance: The underlying mortgage must be 12 months old. Additionally, at least one borrower on the refinance application must be on title for six months.

If you’d like to take additional cash out to pay for cost overruns, out-of-pocket expenses, or simply to invest in the next deal, you’ve got to wait a year since you took out the hard money loan. A cash-out refinance is also required to pay off liens and other loans taken out after the initial purchase.

You should start your refinance application 45-60 days before the one-year mark so you can close as soon as you meet the seasoning requirement.

This could pose a problem if your hard money loan has a six- or nine-month term, and you may need to settle for a no-cash refi.

Property Condition

The reason you get a hard money loan initially is because the property won’t qualify for conventional financing as-is. So you have to bring the property up to standards to refinance with conventional.

Generally, Fannie Mae and Freddie Mac – the two big conventional loan agencies – want a property to be residential in nature and free of deterioration, safety issues, and environmental hazards. Some cosmetic issues are fine, but, you want the home immaculate if you plan to rent it out.

Hopefully, you address all the home’s issues before applying for the refinance. If not, you’ll have to find more time and money to complete the project before refinancing.

Conventional Refinance Alternatives

Not everyone qualifies for conventional lending. Here are alternatives.

DSCR loan: The Debt Service Coverage Ratio loan is based on the property’s cash flow. If it will rent for more than the payments, you can be approved without verifying personal income. This option is great for investors and self-employed individuals who don’t make a lot on paper.

FHA: It’s easier to qualify for FHA than conventional with lower income or credit. You need just a 580 score to refinance a property up to 97.75% loan-to-value. If you don’t have as much equity in the property after repairs as you thought, this could be a good solution.

Another hard money loan: You can buy yourself more time by finding another hard money loan to pay off the original one. You’ll incur high loan fees again, but sometimes it’s the only option.

See If You Qualify for a Conventional Refinance

Whether you have a hard money loan or plan to get one, it’s smart to verify your eligibility for a conventional refinance.

Then you can move forward with your investment goals with confidence.