For many real estate investors, hard money is the go-to short-term loan option that strives to make quick and easy returns. However, sometimes your investment doesn’t always go as planned and you need more time. Is it possible to refinance a hard money loan? What would those scenarios look like? What are the ways in which you can go about it?
First off, let’s answer the questions to which all of this is based on? What is hard money? What is it used for? And who is it aimed towards? Well, hard money is a type of private funding that offers borrowers short-term asset-based financing for real estate investment opportunities. It serves as the go-to alternative financing option for real estate investors for when they either get turned away from or do not wish to pursue a conventional bank loan. Some of the benefits of hard money is that it reduces the amount of documentation and underwriting that bank loans require in favor of a faster application and approval process. As such, hard money lenders prioritize the value of a property and its overall potential as opposed to excessive verification of a borrower’s income, background, credit history, FICO levels, and general commitment. With a hard money loan, the property will serve as collateral for the lender and the borrower is free to engage with their investment.
Some of the downsides of hard money lending is that it deals with higher interest rates, ranging from 9 to 12% respectively, a less lenient LTV ratio, 65-75%, and is generally much more expensive as a result. Because hard money deals with quick-moving, potentially volatile, and risky investment decisions, these rates are set in place to help preserve the lender’s investments in regards to the borrower’s property plans. However, given how disengaging conventional bank loans are with their slow processing times, extensive paperwork requirements, and low approval rates, hard money is still a viable financing option for many as they can get proper financing and the chance to fulfill their real estate ambitions. This means that even though hard money lending is more expensive than a conventional loan, it still offers an opportunity for people to get started with an investment idea, even if they were previously deemed unqualified by a bank loan. As such, hard money is an excellent option for many first-time investors who want to seize upon a property quickly, or for expert investors who want to distribute their liquidity and capital into real estate properties. Overall, hard money is a well-trodden option for many who seek to make quick, short-term equity gains.
But what about the scenarios in which you are falling behind on your loan payments or need more time on the property? What can you do when your the property is not finished or ready but your hard money loan is about to expire? What can you do? Can you refinance? Can you extend the life-span of the loan? The short answer is yes; however, it will always depend on what the capabilities of your lender are and what they initially offer in relation to your investment plan. Even though hard money loans, AKA short-term bridge loans, are specifically designed for a life-span of 12-24 months, there is always the possibility that things don't go as planned, an unexpected disruption happens, or the initial investment plan pivots towards a different strategy or goal. These types of instances can always happen and sometimes it requires you to refinance the loan or ask for more time. There are many scenarios to which things can go unexpectedly wrong: a natural disaster occurs, the property or some resources get lost or become irreparably destroyed, one of your suppliers drops out of their contract, your property manager is doing an insufficient job, a previously undiscovered variable emerges about the property that forces the project to be halted, paused or redirected entirely, an unforeseen tragedy occurs, etc. As a real estate investor working with a short-term loan, you should be fully prepared for whatever comes your way. But while that level of preparedness will save you in many unexpected scenarios, sometimes you will get unlucky. So what can you do? How can you save your property and your investment?
One of the most important things you can do is to keep your lender informed about the project as much as you can. A hard money lender will already understand the real estate a great deal anyway to the point where they can offer guidance, direction, and advice, so it is imperative that they understand what is happening to the property at any and all points. A big reason for this is because, as an investor, they share the similar motivations: produce a gain in the equity of the investment. A lender will also be very focused on the payment schedule, so it is absolutely vital to pay those accordingly. But if it looks like the borrower is going to fall short of the initial planned repayment schedule because of an unexpected disruption, but the real estate investment still has potential, the lender can work with the borrower to refinance the loan and get it to where it needs to be to succeed. That means that even though a hard money loan asks for the investment to be done in about 1-2 years, there are still private lending options where the life-span of the loan can be extended.
As such, you can refinance your hard money loan, and for many reasons too. Some may actually not be as drastic as others. You can even ask your hard money lender for a refinancing option in times when you just want to hold onto the property longer, or rent it out to tenants. Either way, you should always be transparent and honest with your lender about what you are planning to do and what is happening as they have a clear and experienced understanding about where the real estate market sits at all times and can be of great help and insight. You should always be prepared about your property to the point where you can perfectly execute your plan and potentially not be blindsided by the unexpected. Overall, refinancing a hard money loan is a common and valid option for many. Whether they need to restructure their repayment schedule, extend the lifespan of the loan, or redirect the project entirely, refinancing is a key aspect of financing not to be overlooked when looking for potential hard money lenders.
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