What you must do PRIOR to Obtaining a Hard Money Loan

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Smart investors will get pre-approved to refinance their hard money loan prior to obtaining the loan!  Hard money lenders are not in the business of lending their money for the long term.  They will not refinance your project once complete.  Even if the plan is to sell the property for a handsome profit, one never knows what may happen so be prepared to deal with any scenario.

Rehab finance is not a topic that every mortgage broker or banker is familiar with.  I have learned this lesson the hard way and almost lost a property due not being able to find a suitable end lender for my first rehab project.  Especially in today’s difficult financial and real estate market, the rehab investor MUST have a solid exit strategy when using short term loans.

I once thought that if I bought a property at large enough discount that the profits would take care of themselves.  I learned that finding foreclosures at dirt cheap prices is not as difficult as actually selling the finished product for profit.

Most new real estate investors have little money to start with and will get into the rehab business to fix and flip foreclosures for quick cash.   Using hard money is an excellent way to get started, but make sure to understand the rules of the game.  There no such thing as a sure sale in this industry anymore, so one must be ready to refinance and rent out the home if a sale is not possible.

Here are the key issues that must be discussed when looking for an end lender that can refinance a hard money loan:

  • Make it clear that you are trying to refinance a property that you have owned for less than a year.  Most banks have seasoning requirements of one year prior to obtaining a cash out refinance.
  • Do not list your property on the MLS (multiple listing service) while you are trying to refinance your project.  Banks do not like to refinance properties that are currently for sale.
  • Make it clear that you have rehabbed the property and that you need an appraisal based on the improvements made.  Most refinance programs will only want to value your rehabbed home at the most recent sale price if has been less than a year since your purchase.
  • Understand how much cash in reserves you must show in order to refinance.  Most banks are requiring 6 months in reserves for mortgage payments, taxes, and insurance.
  • Most banks will only consider 75% of the rental income when calculating your debt to income ratios.
  • Find out what is minimum credit score needed for your refi situation – these requirements have gone up substantially.
  • Find out exactly what proof of income and assets will be required.

Always be 100% upfront with these and all other items regarding the loan.

Banks have been tightening their lending guidelines and policies and unfortunately the easy money programs have all been eliminated.  This makes it all the more important to develop a relationship with an investor friendly community bank that caters to real estate investors and rehabbers.

 What you must do PRIOR to Obtaining a Hard Money Loan

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