Refinancing Hard Money Loan into a different loan

Member since 2023 · 7 posts · 2 votes

Hello everybody,

Quick question for everybody. Can you purchase a property with a Hard Money loan and then refinance into a different type of loan to have a lower interest rate?

Thank you for your time,

Andrew

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John Mason

Member since 2024 · 1k+ posts · 351 votes

https://www.biggerpockets.com/forums/49/topics/1166073-quest...

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John Mason
Member since 2024 · 1k+ posts · 351 votes
2y
https://www.biggerpockets.com/forums/49/topics/1166073-quest...
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Ko KashiwagiPro Member
Lender · Los Angeles, CA · Member since 2022 · 967 posts · 445 votes
2y
Yes, given you qualify, you can use a conventional or a DSCR loan to lower your rate
310-848-9776
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Stacy RaskinBusiness Member
Lender · Member since 2022 · 1k+ posts · 501 votes
2y
Yes, there are different options to what you can refinance a hard money loan into. If a hard money loan for a rental property many investors refinance from a hard money loan into a DSCR loan that has lower rates and 30 year fixed options. Some lenders can refinance a hard money loan after 3 months of seasoning / waiting and use the new appraised value if the borrower is looking to pull cash out for a new project.
More on DSCR loans: DSCR loans won't use your income to underwrite the loan.

DSCR loans are based off of down payment, credit score and either actual or market rents so it helps to supercharge an investor's real estate goals and net worth.

Here's a bit more in detail about how rates are calculated for DSCR loans:

1. Credit score- the higher the best. 760-780+ generally gets best pricing for investment property loans with most lenders. From there every 20 point increment affect pricing differently. So for example, a 761 credit score will be in the 760-779 credit category, then going down to 740-759 and so on.

2. Loan to value ratio: The higher the loan to value ratio (LTV) is, pricing takes a hit. So your pricing will be higher for a 80% LTV loan than for a 60% LTV loan.

3. Prepayment penalties- usually 1-5 year terms. The shorter the prepayment term has an impact on increasing the rate.

4. Are you cash flowing the property? More on how that is calculated below. Is your DSCR ratio greater than 1-meaning are you cash flowing (according to the lender's criteria of mortgage, property taxes and insurance (and HOA) if applicable). Many lenders will not do a DSCR loan unless cash flowing. If they will do a loan with less than 1, the pricing takes a hit. This criteria is for 1-4 and 5-8 unit programs.

I've included an example below to help illustrate this.

So different lenders have different rates (which do vary even for DSCR loans) but these are factors they all consider.

See example below:

DSCR < 1

Principal + Interest = $1,700

Taxes = $350, Insurance = $100, Association Dues = $50

Total PITIA = $2200

Rent = $2000

DSCR = Rent/PITIA = 2000/2200 = 0.91

Since the DSCR is 0.91, we know the expenses are greater than the income of the property.

DSCR >1

Principal + Interest = $1,500

Taxes = $250, Insurance = $100, Association Dues = $25

Total PITIA = $1875 Rent = $2300

DSCR = Rent/PITIA = 2300/1875 = 1.23

DSCR lenders generally let you vest either individually or as an LLC. It's a great way to increase your net worth and these loans can also be used to pull cash out of a property as it appreciates allowing you to reinvest money into new deals.
Happy to connect to discuss further.
[email protected]818-770-0340
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David Pearl
Lender · Member since 2024 · 121 posts · 14 votes
2y
Quote from @Andrew Low:

Hello everybody,
Quick question for everybody. Can you purchase a property with a Hard Money loan and then refinance into a different type of loan to have a lower interest rate?

Thank you for your time,
Andrew

@Andrew Low - Absolutely! This is a popular method to execute the BRRRR strategy. Purchase with a Fix & Flip loan, then cash out refi using a DSCR loan on the exit. Happy to discuss.
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