5 Hard Money Loan Exit Strategies

Hard money loans for real estate investors and property owners are an important financing tool that allow for fast and flexible funding. Hard money is convenient, but it is for short-term use only, generally 1-3 years. When applying for a hard money loan, the lender is going to ask for the borrower’s exit strategy, since this determines how and when the lender will be paid back. Real estate investors should have multiple potential exit strategies for how to get out of the hard money loan as investment plans and real estate markets can change unexpectedly.

Below are 5 exit strategies for hard money loans.

1. Sell the Property

This is a simple and obvious option, especially when the borrower is obtaining hard money loans for flipping houses or a probate / trust loan to make repairs prior to selling the real estate. The borrower sells the property and the sales transaction pays off the balance of the hard money loan. The remaining proceeds go to the borrower.

2. Refinance the Hard Money Loan to a Traditional Loan

Refinancing from a hard money loan into a traditional loan takes the financing from short term to long term. This will also reduce financing costs as traditional loans will always have lower rates than hard money loans.

Refinancing into traditional loans is appropriate in situations where the property is owner occupied. Borrowers go with a hard money loan initially because they may have issues on their record that prevented banks from lending to them. These issues may include recent foreclosures, bankruptcies, short sales, loan modifications or bad credit. After a few years and some work to repair problems, some of these issues can be taken off a borrower’s record and they will be eligible for a traditional loan again.

In some situations a home will not currently qualify for a traditional loan if the property has condition issues such as missing flooring, an incomplete kitchen or has broken windows. The buyer could use a hard money loan to purchase a property, make the needed repairs and improvements and then refinance with a traditional loan.

3. Refinance into a Subprime Loan

If the hard money loan borrower still hasn’t done enough to qualify for a conventional loan, they may be able to refinance into a subprime loan. Subprime loans have lower requirements than a conventional loan but they have higher interest rates and less favorable terms. They will however offer longer loan terms and lower interest rates than hard money loans.

4. Refinance into a New Hard Money Loan

If refinancing into a subprime loan isn’t an option, the borrower may be able to refinance into a new hard money loan. If the borrower has made all of their payments on time, it may be possible to extend the term of the existing hard money loan. The hard money lender may charge a fee for extending the loan past the agreed upon term. Another option would be to refinance with a different hard money lender with lower rates or better terms. It is important to ensure the monthly payments and the balloon payment due at the end of the agreed upon term are paid in a timely manner, as failure to make these payments will eventually result in foreclosure.

5. Sell other Investments to Pay Off Hard Money Loan

If the borrower doesn’t want to sell the property with the hard money loan and isn’t able to refinance into another type of loan, the borrower can look to raise funds in other ways to pay off the hard money. Selling other properties or liquidating investments may be the best option based on the real estate investor’s current and future investment objectives.

Bonus Exit Strategy – Debt Service Coverage Ratio Loan (DSCR)

If the property is a rental, the borrower may be able to use a DSCR loan to refinance the hard money loan. DSCR loans use the existing rental income for qualification. These loans are for longer terms and typically have favorable relative interest rates.

North Coast Financial is a direct hard money lender (private money lender) serving California. North Coast Financial is one of the most experienced hard money lenders in California with over 45 years of hard money lending experience and more than $1 billion in fast hard money loans funded.

We provide various types of hard money loans to real estate investors and property owners in need of fast and flexible funding options. Our competitive rates and fees and excellent customer service are why our clients continue to choose North Coast Financial for their hard money lending needs. Read client reviews.

Contact North Coast Financial now for a complimentary consultation and quote for your hard money loan request.