Loan Confusion! Hard Money Loan to DSCR loan, but why?
Orange County · Member since 2023 · 44 posts · 22 votes
Loan Confusion! Hard Money Loan to DSCR loan, but why?
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Rental Property Investor · North Palm Beach, FL · Member since 2018 · 2k+ posts · 1k+ votes
3yTypically with real estate, investors will purchase a property with a short-term loan, perform the renovations/updating, and then sell the property or rent it out and refinance it with a longer-term loan (at better rates and terms). For small properties, a hard money loan is usually used, while with larger properties, investors will utilize a bridge loan. They both have the same purpose; allowing buyers to purchase underperforming properties quickly. These loans sometimes require minimum down payments and might even finance part, or even all, of the renovations. These loans are short-term, with no prepayment penalties. A hard money loan usually has a 12-month term while a bridge loan usually has a term of 2-5 years. These lenders want to be in and out. The investor needs to work quickly to renovate and reposition the property.
After the property is stabilized; investors will sell the property or refinance it with a long-term loan (permanent loan). These lenders usually require the investor to leave 20%-35% of the equity in the property but, the rate will be very favorable and the term might go to; 10, 15, 20, 25, or even 30 years.
Some lenders will offer both loans. They might convert the HML to a long-term loan. Some construction loans work this way as well.
13 Replies
- Investor · Tampa, FL · Member since 2019 · 1k+ posts · 1k+ votes3y
The main advantage I see with HML is that you can make a smaller down payment and receive rehab funds to renovate the property, potentially increasing its value. This could enable you to refinance with DSCR without needing to provide additional equity, since the new appraised value would likely give you at least 20% equity.
- Rental Property Investor · North Palm Beach, FL · Member since 2018 · 2k+ posts · 1k+ votes3y
Typically with real estate, investors will purchase a property with a short-term loan, perform the renovations/updating, and then sell the property or rent it out and refinance it with a longer-term loan (at better rates and terms). For small properties, a hard money loan is usually used, while with larger properties, investors will utilize a bridge loan. They both have the same purpose; allowing buyers to purchase underperforming properties quickly. These loans sometimes require minimum down payments and might even finance part, or even all, of the renovations. These loans are short-term, with no prepayment penalties. A hard money loan usually has a 12-month term while a bridge loan usually has a term of 2-5 years. These lenders want to be in and out. The investor needs to work quickly to renovate and reposition the property.
After the property is stabilized; investors will sell the property or refinance it with a long-term loan (permanent loan). These lenders usually require the investor to leave 20%-35% of the equity in the property but, the rate will be very favorable and the term might go to; 10, 15, 20, 25, or even 30 years.
Some lenders will offer both loans. They might convert the HML to a long-term loan. Some construction loans work this way as well.
- Contractor · Scottsdale, AZ · Member since 2010 · 2k+ posts · 3k+ votes3y
If you are buying a rental property that is turn-key, ready to rent, then you should just use a DSCR loan to buy it.
If you are buying a property that will require a remodel, that is where you might need to buy with a hard money loan. You'll do your remodel and then refinance into a DSCR loan when you're finished.
It makes sense to avoid doing 2 loans if you can. You will be paying closing costs twice if you start with a hard money loan and then refinance into a DSCR.
- Orange County · Member since 2023 · 44 posts · 22 votes3y
Quote from @Charles Carillo:
Typically with real estate, investors will purchase a property with a short-term loan, perform the renovations/updating, and then sell the property or rent it out and refinance it with a longer-term loan (at better rates and terms). For small properties, a hard money loan is usually used, while with larger properties, investors will utilize a bridge loan. They both have the same purpose; allowing buyers to purchase underperforming properties quickly. These loans sometimes require minimum down payments and might even finance part, or even all, of the renovations. These loans are short-term, with no prepayment penalties. A hard money loan usually has a 12-month term while a bridge loan usually has a term of 2-5 years. These lenders want to be in and out. The investor needs to work quickly to renovate and reposition the property.
After the property is stabilized; investors will sell the property or refinance it with a long-term loan (permanent loan). These lenders usually require the investor to leave 20%-35% of the equity in the property but, the rate will be very favorable and the term might go to; 10, 15, 20, 25, or even 30 years.
Some lenders will offer both loans. They might convert the HML to a long-term loan. Some construction loans work this way as well.
@Charles Carillo Thank you for outlining this. This clarifies the overall cash flow and advantages of why I'd use this. What lenders would offer both and would convert HML into DSCR loans?
- Orange County · Member since 2023 · 44 posts · 22 votes3yThat was my logic exactly! Why would I want to go through the loan process twice and add more processing fees and closing costs to the situation.
Quote from @Scott E.:
If you are buying a rental property that is turn-key, ready to rent, then you should just use a DSCR loan to buy it.
If you are buying a property that will require a remodel, that is where you might need to buy with a hard money loan. You'll do your remodel and then refinance into a DSCR loan when you're finished.
It makes sense to avoid doing 2 loans if you can. You will be paying closing costs twice if you start with a hard money loan and then refinance into a DSCR.
But I’m only looking at fixer-uppers (absolutely no turn key) so this path of HML to DSCR seems like the usual option. - Investor · Austin, TX · Member since 2021 · 9k+ posts · 5k+ votes3y
Going from hard money to DSCR should be a necessity. You use hard money to fund property that needs rehab and un-fundable with conventional financing. It is not cheap to take out two loans, the closing costs will eat your profit.
- 3yNicholas L.Pro MemberFlipper/Rehabber · Pittsburgh · Member since 2018 · 6k+ posts · 5k+ votes
- Lender · FL · Member since 2023 · 27 posts · 17 votes3y
Hello,
It depends on what you need. If you intend to rehab the property, your best option is to get an HML short-term loan that includes a percentage of the purchase price and 100% rehab costs, interest-only payments, and no prepayment penalty. After the property is renovated and rented, refinance to a DSCR Loan. The new renovations will make the appraisal for the property higher, this will give you the option to get more money for the loan. Renting the property will make it easier to get the loan approved because the lender won't need to rely on an estimate of how much the rent would be. Having done both, you can ask for good terms when negotiating the refinance. Take into consideration that some HMLs offer both types of loans when looking for a lender.
However, if the property is ready to rent, you do not need an HML loan, you can just apply for the DSCR Loan.
- Investor · Clairemont, CA · Member since 2011 · 3k+ posts · 2k+ votes3y
You need to evaluate the cost of two loans vs the benefit of rehab using your own cash. If the property is a heavy fixer with a lot of value add, then the two loans makes more sense. If this would be a light paint and carpet rehab then it doesn't make sense for the additional costs based on the minimal value add potential.
- Real Estate Agent · NJ · Member since 2021 · 569 posts · 127 votes3y
If it's not rent ready and you need to do repairs, you will need the bridge loan typically 80% purchase and 100% rehab, fix it up and get is rented then you can either cash out or refi into a 30 year. If its rent ready and leased but needs minor repairs you can do over time I suggest going right into a perm loan.
- Lender · Austin Texas · Member since 2022 · 319 posts · 156 votes3y
If Rehab heeded - go hard money
If no rehab needed/turkey you can go straight into DSCR.
With your experience level the down payments should be the same.
- 3yStephanie P.Pro MemberWashington, DC Mortgage Lender/Broker · Member since 2016 · 4k+ posts · 2k+ votes
Quote from @Kimberly C.:
Hello, I'm just starting out and doing research for my first OOS rental property. I am only familiar with conventional 30 year fixed rate loans as this is what I've used in the past for my primary residence.
I've been looking into DSCR loans and think this would be the best fit for me because I currently have a LLC with 1 rental property. I would like to continue my rental investment property journey and obtain loans under my LLC. My understanding is that DSCR is one option that fits this requirement.
BUT I've been told the better route would be to get a HML then convert it to DSCR after?
1) How does this work?
2) Why would I do this?
3) What is the time frame for this? Do I only have a HML for 4 months or something and then get a DSCR?
I'm confused on the why this is suggested and logistics and time frame. If someone could break this down with an example of numbers so I can see how this plays out with cash I need to fund, cash I'm borrowing, etc that would really be helpful.
Typically, you'll need a 6 month period of seasoning between purchase and your refinance. All construction should be complete and the property should be leased to go with a DSCR loan.
- 2dErik EstradaBusiness MemberLender · Member since 2022 · 6k+ posts · 1k+ votes
Hey Kimberly,
The only real reason to go with a hard money loan and then refi into a DSCR loan, is to acquire distressed, under-valued properties, rehab and then refinance and pull cash out.
1) How does this work?
Step 1: Find a property under market value that needs rehab
Step 2: Get the property under contract and close on it with hard money
Step 3: Rehab and finish the property to ensure it will appraise
Step 4: Cash Out Refinance with a DSCR loan, payoff hard money loan and pull equity out. The rent should cover the full new mortgage payment.
2) Why would I do this?
There are many reasons. Some do this to help with income taxes (business owners, self-employed), others want to build a rental portfolio quickly, (hard money is fast and so is DSCR financing).
3) What is the time frame for this? Do I only have a HM
From A to Z it will most likely take you 4-6 Months. It just depends on how quick you move on the rehab and how quickly you can close on the refi.
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