If you own a rental property, and are looking to get a loan done, it may feel like your options are limited. The most common loan done on a rental property is a conventional loan, but the qualifying criteria can be strict – such as having good credit scores, having well documented rental income, and having enough personal income to cover all of your liabilities.
Hard Money Lenders For Rental Properties usually don’t put as much weight into the borrower’s credit scores and focus more on the equity available to lend on. Hard money loans are business purpose loans, and act as temporary financing. If you are pulling cash out of a rental property, this can count as a business purpose loan – as the rental is an investment.
Finding a reputable hard money lender for a rental property can often be the toughest part of the process. In general, they should be very quick to close, unless there is something unique that causes a delay (such as needing paperwork from an HOA, but they are not responsive). Furthermore, your loan officer should be walking you through the entire process, with all terms disclosed initially – and any changes, such as the cash out amount if the appraisal comes in low, being disclosed as the process goes on. Finding somebody that is easy to work with, keeps you informed, and makes sure you know all your options; is very important when looking for a hard money lender for your rental property.
Some of the most common reasons we see people looking for a Hard Money Lender For Rental Properties on their rental property would be:
- Needing funds to remodel the home, particularly in between tenancy.
- Needing funds to complete necessary repairs on the home.
- Needing funds to pay back-taxes or HOA fees on the property.
- Needing funds to pay off existing liens/mortgages on the home (such as seller financing, where the seller does not want to continue holding the mortgage).
- Needing funds to add an ADU to the property, for short term rentals.
With a hard money loan, the amount of cash out you can get will be determined by the equity available; as hard money investors typically do not lend above 60% loan to value on a cash out refinance. An easy way to calculate how much the maximum cash out would be, all other qualifying factors aside, is: Current home value x 0.6, minus the balance of any existing liens/mortgages.
An example: $400,000 home x 0.6 = $240,000. If there is a mortgage being paid off of $125,000; $240,000 – $125,000 = $115,000 maximum cash out.
Typically, the cash out will be less than the maximum, as closing costs usually come out of the cash out amount. Hard money loans can have higher fees, as they are with private investors and lenders, so make sure to be aware of this when choosing your loan amount. Usually, it is common to apply for a loan amount that factors in $10-20,000 above the cash out you needed – so that there is room for all the fees, and any potential surprises (such as property taxes that need to be paid out through the loan, or a judgment that had been forgotten about). If you need to adjust the loan amount later down the road, before closing, that is usually an option.
After applying for a hard money loan, your loan officer or lender will provide you with initial disclosures that have a loan estimate – which will be an estimate of all fees, and an estimate of the cash out. The loan estimate is just that – and estimate. So, some items may come in cheaper or more expensive within reason, as the loan is processed and invoices are received for different services. This can include the appraisal, title, escrow, notary, and document preparation fees. The cash received at closing can also fluctuate during the process, if anything shows up on title that needs to be paid off. So, if you have any back taxes, HOA dues, liens, or judgements, you may need to pay those off through the loan – utilizing part of the cash out funds.
Hard Money Loans For Rental Properties are usually quick to close, comparatively to more traditional loan programs. Conventional loans and DSCR loans can take 30-45 days on average, whereas a hard money loan usually takes 2-3 weeks. Those 2-3 weeks are spent in underwriting, getting an appraisal, and creating closing documents. Once you sign the closing documents, it usually takes a week for the new mortgage to record and you to receive funds. On most hard money closing documents, there will be an option to receive either a check or a wire of the cash out amount, so if you opt to receive a check, it may take longer.
As noted above, hard money loans are also temporary loans. They are usually 2-5 years in length, with interest only payments, and a balloon for the principal at the end of the loan term. With interest only payments, there are pros and cons. The biggest pro is that while rates are high, interest only payments – even at a higher rate – are typically lower than a monthly payment with principal included. The biggest con is that the loan will not amortize while you are in it, so the principal owed will not go down. However, as hard money loans are temporary loans, ballooning at the end of the term, your loan officer should be discussing an exit strategy with you. Unless you are looking to sell the property in the near future, most people look into refinancing the loan into an amortizing 15 or 30 year option before the end of the loan term. During the time you are in the hard money loan, you will want to maintain or cultivate good credit and document all income that you can; to be able to refinance into a conventional or DSCR loan. On certain occasions, we can refinance a hard money loan into another hard money loan, but this is just buying time; and will cost more fees to do so. It is important to ensure that you are lining up your finances strategically, to be able to refinance later down the road into a more traditional amortizing loan product.
At Independent Home Finance Inc., we have multiple hard money loan specialists that have decades of experience in the industry. Whether you are looking for a hard money loan, or a different type of loan, we are here to help. We work with multiple different investors and lenders, to help find you the best loan for your situation; and make sure you are fully informed of all your options. Reach out today, for a free consultation, to see how we can help you achieve your goals.