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A hard money loan is meant to be a short-term funding source that needs to be repaid much sooner than other mortgages. Usually, the term is between six months and two years.
Most buyers who plan to keep their property beyond that term will need to refinance into a longer-term solution. One common option is to refinance a hard money loan to a conventional mortgage.
But to do that, you need to make sure you qualify for a conventional loan now.
Here are the requirements for refinancing from a hard money loan to conventional, and how to meet those requirements if you didn’t when you took out the hard money loan.
Qualifications to Refinance From Hard Money to Conventional
Whether you chose a hard money loan because they close quickly or you wanted to fix-and-flip the property, you first need to meet the basic lending requirements for a conventional loan. The basic lending requirements are:
- 620 credit score
- You can prove enough income to qualify for the loan (plus any other real estate or consumer debt payments on your credit report)
- You have two years of verifiable employment history, self-employed history, or related education
- At least 25% equity in the property
- Adequate funds to pay for closing costs and meet reserve requirements
- The property is in adequate condition
Property Requirements
It’s common for investors to take out a hard money loan when they plan to fix up and sell or rent out a property. Often, these investments don’t meet the minimum property guidelines for a conventional mortgage, which requires a home to be “safe, sound, and secure.”
Homes that are unlivable, have prominent structural or roof issues, or will otherwise be unable to qualify for homeowners insurance can still be denied funding.
If you want to refinance a hard money loan to a conventional one, you will need to bring the property up to at least habitable standards. However, even if the work isn’t complete, you may still have another option.
Borrowers who have run out of time or funds to make the necessary improvements to their property but otherwise meet conventional lending guidelines may be able to get a renovation refinance loan through the HomeStyle Renovation and CHOICERenovation programs.
Credit Score Requirements
Hard money lenders don’t care as much about your credit score. Instead, their primary focus is on the viability of your deal and the value of the asset securing the loan. You could have a credit score of 500 and potentially qualify for a hard money loan.
However, refinancing into a conventional mortgage requires a credit score of at least 620. Although you can’t necessarily fix your score overnight, it’s entirely possible to build some credit over the term of a hard money loan.
Debt-to-Income Requirements
Similarly, when you take out a hard money loan, there will be less focus on your earnings and existing debt. As long as the lender believes you’ll be able to make your monthly payments over the short duration of the loan, you can get approved.
For a conventional mortgage, however, you will generally want a debt-to-income ratio of 45% or lower. However, some lenders may approve applicants as high as 50% if they have other compensating factors, such as a high credit score or considerable assets.
Employment History or Proof of Income Requirements
You’ll need at least two years of consistent documented income in the same field or equivalent education. It’s possible for someone with a hard money loan to have established sufficient employment and income history throughout their loan term to refinance into a conventional mortgage.
Is There a Waiting Period to Refinance My Hard Money Loan?
The waiting period to refinance your hard money loan depends on the type of conventional refinance you need.
Hard Money Loan to Conventional Rate-and-Term Refinance
A rate-and-term refinance allows you to pay off your hard money loan and any other loans used to purchase the property. It will not, however, let you receive any cash back at closing to reimburse yourself for expenses or improvements.
Conventional guidelines don’t require a loan seasoning period if you’re doing a rate-and-term refinance – you could take out your hard money loan and refinance conventional a month later.
Rate-and-term refinances for investment properties need at least 25% equity, meaning that the lender will be willing to refinance up to 75% of the home’s current appraised value. If you occupy the property as your primary residence, you will likely need a minimum of 5% equity.
However, if you’re doing a rate-and-term refinance with under 20% equity, you will need to pay for private mortgage insurance. While PMI costs can be high for borrowers refinancing with bad credit, the total monthly payment will still likely be much lower than a hard money loan with higher interest.
Hard Money Loan to Conventional Cash-Out Refinance
If you want to reimburse yourself for any expenses or work you paid for out of pocket, you’ll need to do a cash-out refinance. You will also need to do a cash-out if you have any second liens on the property not associated with the purchase, such as a HELOC that you used for renovations.
However, lender guidelines require a loan seasoning period of 12 months when refinancing a hard money loan (or any other type of mortgage) with a conventional cash-out. In addition, at least one borrower applying for the loan must have been on the property’s title for at least six months.
Conventional cash-out refinances require a minimum of 25% remaining equity on single-unit investments and 30% on properties with two to four units. If you have a hard money loan on your primary residence, the remaining equity requirements are 20% for a single unit and 25% for two to four units.
» MORE: See today’s refinance rates
Trouble Refinancing Your Hard Money Loan to Conventional?
If you don’t qualify for a conventional refinance, there’s no need to panic. You still have other options to consider. Plus, your lender may be willing to work with you to come up with a personalized solution.
Apply for a DSCR Loan
Debt service coverage ratio (DSCR) loans are a type of long-term funding based on a property’s ability to generate income and sustain its own mortgage costs. The DSCR is calculated by dividing a rental’s net operating income by its total housing expense.
A DSCR of 1.0 would represent a property with a net income equal to its debt obligations.
Some DSCR lenders may require a ratio of 1.25 or higher, while others could approve your loan with a flat 1.0. If you have decent credit and your property has a ratio of at least 1.1, you should be able to find a lender willing to offer a DSCR loan.
Refinance Into Another Hard Money Loan
The simplest alternative may just be to refinance into another hard money loan. If the property has maintained sufficient value, you should have little issue qualifying for a hard money refinance.
While the costs will be higher than a conventional loan, refinancing through a private lender will give you more time to work on your exit strategy and improve the limitations preventing you from refinancing conventionally.
Talk With Your Hard Money Lender
Hard money lenders are in the loan business, not the real estate business. While not being able to refinance your loan could put you at risk of default, the majority of lenders will be hesitant to rush into foreclosure.
In many cases, your private lender will be willing to work with you to create a custom plan or loan extension that allows them to continue receiving payments while you consider your options for refinancing.
5 Tips for Refinancing a Hard Money Loan
Refinancing a hard money loan is similar to refinancing any other type of mortgage. As long as your loan meets seasoning requirements and you’ve addressed any issues that may initially have prevented you from qualifying, doing a conventional refinance should be straightforward.
To help ensure you qualify and get the best refi deal possible, here are five tips for refinancing a hard money loan into a conventional mortgage:
1. Have a good idea of your equity level and borrowing needs.
You don’t need to know exactly how much equity you have in your home, but investors will need 15% to 25% equity for a rate-and-term refinance and 25% to 30% for a conventional cash-out refinance.
2. Go over your credit report for errors.
Errors on your credit report could prevent you from being approved for a conventional refinance. Even if you qualify, you’ll likely receive higher rates and PMI costs if your credit score is artificially low due to erroneous entries.
3. Apply with more than one lender.
Experts recommend applying with at least three lenders when planning a refinance. This allows you to ensure that you’re being offered a competitive rate and that lender-specific closing costs aren’t higher than they should be.
4. Use your loan estimates to negotiate lower rates and closing costs.
Another benefit of applying with multiple lenders is that you can use your loan estimates to negotiate lower rates and closing costs. You can’t negotiate all closing costs, but you may be able to bring down expenses such as underwriting/origination, application, or processing fees.
5. Plan ahead to ensure your loan can close on time.
Since hard money loans are short-term funding, have a plan for refinancing well before the note comes due. If you aim to refinance a hard money loan to conventional, make sure to begin the process months in advance to allow for any delays.
Refinance a Hard Money Loan Into a Conventional Mortgage
Are you ready to get out of your hard money loan and into a conventional mortgage? The best way to find out if there are any roadblocks in your way is to talk with an experienced mortgage professional. To get started, check your current local mortgage rates and apply with a lender licensed in your area.