A hard money loan is an excellent option for many borrowers. While these loans don’t have as stringent income or credit score requirements as conventional loans, they have higher interest rates and shorter terms. You must have exit strategies in mind to pay off the loan when necessary before you take out a hard money loan.
Here are some of the most common hard money loan exit strategies.
- Sell the Property
- Get New Loan
- Traditional Mortgage
- Subprime Mortgage
Selling your property for a nice profit is one of the most common exit strategies for hard money loans. The strategy is popular because many borrowers using hard money loans in Texas do so to purchase a property, improve it, and sell it for a profit. The benefits of this option are that the borrower can have an extended time to pay off the loan and take advantage of using the loan as a cost for rehab. Some borrowers have used this option more than once because they were successful in their first sale and would like to capitalize on their investment expertise again.
Refinancing can be a good option when the investor plans to use the property as a rental after closing on it. Refinancing with a traditional lender will allow some time to close on another loan you intend to use for a more extended period. Hard money loans can also be used as a bridge between applying for and being approved for another loan you intend to use for a more extended period.
Get New Loan
You may be able to get an additional hard money loan, but this is usually only recommended when all other options have been exhausted. It can help you buy some time or avoid foreclosure.
Getting a traditional mortgage after a hard money loan is a great way to take advantage of the many benefits of hard money loans. By waiting until you have a lower debt-to-income ratio and have raised your chances of qualifying for a better loan, you can get access to traditional financing terms such as a lower interest rate, longer repayment period, and lower overall payment amount.
If you’re unable to qualify for a traditional mortgage, consider a subprime mortgage. With this type of loan, you’ll get a lower interest rate and shorter amortization than a hard money loan. It can provide the funds to exit the hard money loan and provide long-term financing for the property.
As always, if you are considering a hard money loan to fund your business or investment, don’t forget that your best bet is to have things lined up before you go to the bank for funding. Be sure that you have verified the capability of your borrower to repay the loan, and do your research with existing loans—just like any lender would.