(refinance) hard money lender vs conviental for investment 30 year fixed
Member since 2023 · 25 posts · 9 votes
(refinance) hard money lender vs conviental for investment 30 year fixed
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Robin SimonBusiness Member
Lender · Austin, TX · Member since 2022 · 5k+ posts · 4k+ votesQuote from @Phil Shelton:
do you guys think that the rates that hard money lenders that provide rental loans are so close to what conviental banks offer that HML are easier to refinance with?
Hard Money lenders that also do refinance loans (these would almost always be "DSCR" loans) are definitely "easier" to refinance with. Its generally a trade off - where conventional is going to be about 1% less in rate, while the DSCR refinance would be about 1% higher in rate and maybe an extra point or two but MUCH MUCH easier in terms of qualification, underwriting and process
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15 Replies
- Real Estate Broker · New York, NY · Member since 2020 · 2k+ posts · 1k+ votes3y
Hey @Phil Shelton - a conventional mortgage will always have a lower rate than a HML.
A HML option should not be held for 30 years, and it will be very rare to find a HML that will allow you to hold the note for that long without severe penalties and points charged on top of it.
- Real Estate Broker · Hyde Park Tampa, FL · Member since 2019 · 2k+ posts · 3k+ votes3y
Nooooo...Hard Money Lenders do not offer permanent, long term financing. They're used primarily for acquisition and renovation to get you started fast but at a significantly higher cost. I recommend taking the time to learn more about mortgage financing and the qualifications the lender will require of its borrower. Gotta KNOW this stuff...
- 3yRobin SimonBusiness MemberLender · Austin, TX · Member since 2022 · 5k+ posts · 4k+ votes
Quote from @Phil Shelton:
do you guys think that the rates that hard money lenders that provide rental loans are so close to what conviental banks offer that HML are easier to refinance with?
Hard Money lenders that also do refinance loans (these would almost always be "DSCR" loans) are definitely "easier" to refinance with. Its generally a trade off - where conventional is going to be about 1% less in rate, while the DSCR refinance would be about 1% higher in rate and maybe an extra point or two but MUCH MUCH easier in terms of qualification, underwriting and process
Harpoon Capital514 Reviews - Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes3y
@Phil Shelton generally Hard money lenders do not make long term loans. I know one that has a high rate for 5 years that is fully amortized but no hard money lender wants there money out their for 30 years. Hard money lenders make their money on the, up front points, as much as the interest rate. They make more by turning their money as opposed to keeping it in one loan for a long time.
Even if you did find one that would do it, the difference in price would not even be close or worth considering.
Now part of the question is what do you mean by "Conventional" In the industry that has a specific meaning. You probably mean traditional lenders like banks and mortgage brokers. However now there is a new breed of lender that is somewhere between hard money and traditional lenders. The easiest way to find them would be look for DSCR (debt service coverage ratio) loans.
- Member since 2023 · 25 posts · 9 votes3y
Quote from @Ned Carey:
@Phil Shelton generally Hard money lenders do not make long term loans. I know one that has a high rate for 5 years that is fully amortized but no hard money lender wants there money out their for 30 years. Hard money lenders make their money on the, up front points, as much as the interest rate. They make more by turning their money as opposed to keeping it in one loan for a long time.
Even if you did find one that would do it, the difference in price would not even be close or worth considering.
Now part of the question is what do you mean by "Conventional" In the industry that has a specific meaning. You probably mean traditional lenders like banks and mortgage brokers. However now there is a new breed of lender that is somewhere between hard money and traditional lenders. The easiest way to find them would be look for DSCR (debt service coverage ratio) loans.
in a refinance deal
for DSCR = Annual Net Operating Income / Annual Debt-Service
(1) is the Annual Net Operating Income just gross rents? so if its a 2 unit property and rents are 2500/2500 it is = 5,000 x 12 = 60k annual
(2) is Annual Debt-Service the new loan amount? so Ie 750k?
so my ratio is 60k/750k = 0.08? - Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes3y
@Phil Shelton you have to ask the specific lender. All lenders have different terms.
The lender may use; gross income minus Debt service OR gross income minus PITI, OR net operating income minus debt service. What they include in "Net Operating Income" is up to them, they may have some formula to calculate it using standard numbers for expenses or they could (but not likely) want actual expenses.
True commercial loans on large properties require actual expenses with adjustments and some carve outs. But we are talking multi million dollar deals here. DSCR lenders for SFH rentals generally have a pretty simple formula but you need to ask the specific lender what numbers they use.
- 3yMark MunsonBusiness MemberLender · Orlando, FL · Member since 2022 · 440 posts · 300 votes
Anyone that says a HML doesn't do long-term financing is incorrect, numerous do. The standard is 30-years and usually 1% above a conventional loan or so. They aren't holding the note for 30-years, it gets sold on the secondary market, but you have 30-years to pay it off. There is a significant lack of knowledge in our space on what options are out there, I suggest connecting with as many lenders and brokers as you can to see what they might have. I can give you 20 examples of lenders that are on the HM side that do this and I have done them personally for years. A HML loan won't report to the credit bureaus, so there are advantages, many beyond that. It is a far easier underwriting process, feel free to reach out to get some actual feedback on what the markets offer.
- Lender · Fort Lauderdale, FL (Lending in FL CT GA MI PA) · Member since 2022 · 470 posts · 349 votes3y
@Phil Shelton in the example you did for DSCR, your annual debt service would be a year of mortgage payments, not your whole loan balance. Rent/Mortgage Payment.
DSCR is easier to get, but if you have the personal income to support it, conventional should give you better rates, less points, and no prepayment penalty.
- Lender · Seattle, WA · Member since 2014 · 2k+ posts · 899 votes3y
@Phil Shelton- a conventional bank refinance will have better terms ( rate and fee) than any hard moeny lender ...if you are able to get a conv loan approved with soem elbow grease - its worse the hassle ....good luck
- 3yStephanie P.Pro MemberWashington, DC Mortgage Lender/Broker · Member since 2016 · 4k+ posts · 2k+ votes
Quote from @Mark Munson:
Anyone that says a HML doesn't do long-term financing is incorrect, numerous do. The standard is 30-years and usually 1% above a conventional loan or so. They aren't holding the note for 30-years, it gets sold on the secondary market, but you have 30-years to pay it off. There is a significant lack of knowledge in our space on what options are out there, I suggest connecting with as many lenders and brokers as you can to see what they might have. I can give you 20 examples of lenders that are on the HM side that do this and I have done them personally for years. A HML loan won't report to the credit bureaus, so there are advantages, many beyond that. It is a far easier underwriting process, feel free to reach out to get some actual feedback on what the markets offer.
Just curious. Are you equating DSCR with hard money?
- 3yMark MunsonBusiness MemberLender · Orlando, FL · Member since 2022 · 440 posts · 300 votes
Quote from @Stephanie P.:
Quote from @Mark Munson:
Anyone that says a HML doesn't do long-term financing is incorrect, numerous do. The standard is 30-years and usually 1% above a conventional loan or so. They aren't holding the note for 30-years, it gets sold on the secondary market, but you have 30-years to pay it off. There is a significant lack of knowledge in our space on what options are out there, I suggest connecting with as many lenders and brokers as you can to see what they might have. I can give you 20 examples of lenders that are on the HM side that do this and I have done them personally for years. A HML loan won't report to the credit bureaus, so there are advantages, many beyond that. It is a far easier underwriting process, feel free to reach out to get some actual feedback on what the markets offer.
Just curious. Are you equating DSCR with hard money?
I don't know if equate is the right word, but all of your major HMLs offer DSCR loans. HML was flooded with institutional capital over the last few years, allowing most HMLs to offer a DSCR product through their secondary market investor or allowing them access to the capital markets to sell those notes. So yes, in a sense, because DSCR loans are available through HMLs. Institutional money (Wall-Street) has even changed their outlooks on lending due to HM over the last few years. The very definition of HM is as follows:
A hard money loan is a specific type of asset-based loan financing through which a borrower receives funds secured by real property. Hard money loans are typically issued by private investors or companies. Interest rates are typically higher than conventional commercial or residential property loans because of the higher risk and shorter duration of the loan.
Outside of the loan duration mentioned above, a DSCR loan fits that mold. The extent of the qualifications stemming from the borrower is their credit score; otherwise, it is entirely asset-based. If the asset is cash-flowing or the rents are at par with the monthly payment, the vast majority of people will qualify with some DSCR lender, because we are lending money based upon the asset. - 3yStephanie P.Pro MemberWashington, DC Mortgage Lender/Broker · Member since 2016 · 4k+ posts · 2k+ votes
Quote from @Mark Munson:
Quote from @Stephanie P.:
Quote from @Mark Munson:
Anyone that says a HML doesn't do long-term financing is incorrect, numerous do. The standard is 30-years and usually 1% above a conventional loan or so. They aren't holding the note for 30-years, it gets sold on the secondary market, but you have 30-years to pay it off. There is a significant lack of knowledge in our space on what options are out there, I suggest connecting with as many lenders and brokers as you can to see what they might have. I can give you 20 examples of lenders that are on the HM side that do this and I have done them personally for years. A HML loan won't report to the credit bureaus, so there are advantages, many beyond that. It is a far easier underwriting process, feel free to reach out to get some actual feedback on what the markets offer.
Just curious. Are you equating DSCR with hard money?
I don't know if equate is the right word, but all of your major HMLs offer DSCR loans. HML was flooded with institutional capital over the last few years, allowing most HMLs to offer a DSCR product through their secondary market investor or allowing them access to the capital markets to sell those notes. So yes, in a sense, because DSCR loans are available through HMLs. Institutional money (Wall-Street) has even changed their outlooks on lending due to HM over the last few years. The very definition of HM is as follows:
A hard money loan is a specific type of asset-based loan financing through which a borrower receives funds secured by real property. Hard money loans are typically issued by private investors or companies. Interest rates are typically higher than conventional commercial or residential property loans because of the higher risk and shorter duration of the loan.
Outside of the loan duration mentioned above, a DSCR loan fits that mold. The extent of the qualifications stemming from the borrower is their credit score; otherwise, it is entirely asset-based. If the asset is cash-flowing or the rents are at par with the monthly payment, the vast majority of people will qualify with some DSCR lender, because we are lending money based upon the asset.I think you missed the spirit of @Ned Careys post. Whether a hard money lender offers a DSCR product or not, there's a huge distinction over the hard money portion that's generally short term and interest only with a long term DSCR loan that's typically amortized over 30 years.
- Lender · Los Angeles, CA · Member since 2022 · 238 posts · 73 votes3y
@Phil Shelton Hard money loans/private money is used for acquisition and renovations and are usually 12-24 month interest only. Conventional banks or DSCR loans are used for the exit strategy if the investor decides to keep it as rental. I agree with @Patricia Steiner and recommend taking the time to learn more about mortgage financing and the qualifications the lender will require of its borrower.
- 3yMark MunsonBusiness MemberLender · Orlando, FL · Member since 2022 · 440 posts · 300 votes
Quote from @Stephanie P.:
Quote from @Mark Munson:
Quote from @Stephanie P.:
Quote from @Mark Munson:
Anyone that says a HML doesn't do long-term financing is incorrect, numerous do. The standard is 30-years and usually 1% above a conventional loan or so. They aren't holding the note for 30-years, it gets sold on the secondary market, but you have 30-years to pay it off. There is a significant lack of knowledge in our space on what options are out there, I suggest connecting with as many lenders and brokers as you can to see what they might have. I can give you 20 examples of lenders that are on the HM side that do this and I have done them personally for years. A HML loan won't report to the credit bureaus, so there are advantages, many beyond that. It is a far easier underwriting process, feel free to reach out to get some actual feedback on what the markets offer.
Just curious. Are you equating DSCR with hard money?
I don't know if equate is the right word, but all of your major HMLs offer DSCR loans. HML was flooded with institutional capital over the last few years, allowing most HMLs to offer a DSCR product through their secondary market investor or allowing them access to the capital markets to sell those notes. So yes, in a sense, because DSCR loans are available through HMLs. Institutional money (Wall-Street) has even changed their outlooks on lending due to HM over the last few years. The very definition of HM is as follows:
A hard money loan is a specific type of asset-based loan financing through which a borrower receives funds secured by real property. Hard money loans are typically issued by private investors or companies. Interest rates are typically higher than conventional commercial or residential property loans because of the higher risk and shorter duration of the loan.
Outside of the loan duration mentioned above, a DSCR loan fits that mold. The extent of the qualifications stemming from the borrower is their credit score; otherwise, it is entirely asset-based. If the asset is cash-flowing or the rents are at par with the monthly payment, the vast majority of people will qualify with some DSCR lender, because we are lending money based upon the asset.I think you missed the spirit of @Ned Careys post. Whether a hard money lender offers a DSCR product or not, there's a huge distinction over the hard money portion that's generally short term and interest only with a long term DSCR loan that's typically amortized over 30 years.
That's fair, I guess we just disagree, which is the point of forums I suppose, to hear opposing views or ideas. Many DSCR loans are IO, so there isn't really a "universal" term structure of them, in my opinion. In his post, he said: "Hard money lenders do not make long term loans." That is not true, so I just disagree with that statement. He also said: "Hard money lenders make their money on the, up front points, as much as the interest rate." That's true, but they also make money while selling the note, albeit less so than they did a year ago. He also said: "Even if you did find one that would do it, the difference in price would not even be close or worth considering." That's also far from true. If the spirit of his post was something different, than my reply was off. I guess I was more so responding to what he was writing literally.
- Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes3y
@Mark Munson as I alluded to in my post and have stated elsewhere there is a new breed of lender and lines between lending types have become blurred. A hard money loan is traditionally based on the value of the HARD ASSET. A DSCR loan is bason the DSCR. Tow distinct different types of loans.
You are correct that an Hard Money Lender may sell a DSCR loan these days and that makes the line blurry. Mortgage brokers I am sure also offer many new types of loans like DSCR loans than they did in the past. However I think it is good for us more knowledgeable people on the forum to do more to clarify than to confuse.
I use and propose for others the following
1) Traditional lender- banks and loan traditionally sold through mortgage brokers, made primarily on the credit of the borrower.
2) Hard money loans - Loans made primarily based on the value of the asset
3) DSCR loans- loans made primarily on the debt service coverage ratio of the property
4) Private money - Friends and family that lend primary because they know and trust you. There are institutional lenders that call themselves "Private Lenders" I think this is a misnomer and misleading. There is a clear distinct difference between negotiating with a close associate of family member and an institutional lender.
While DSCR and Hard Money are both "Asset Based as you say. one is based o the value of the asset and the other is based on the cash flow of the asset. I think that is a pretty clear distinction.
Obviously the lines have become more gray but this is a framework that helps new investors understand how the different types of lenders work and how it might affect the type of loan they can get.
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