Hard Money - Converting to Conventional Loan

[Bill Mitchell]

I have never been through the HML process, but it is to my understanding as soon as the property has been properly rehabbed and up to code/inspection you must convert from the high interest HML to a conventional loan.

Is this difficult to do generally? My biggest feat with hard money is needing to convert to conventional but being stuck with hard money and unable to get out of it and the 18%+ interest. Its even more of a concern because I own my business and its harder to get conventional lenders on board unless you have a typical 9 to 5.

[Mike H.]

Converting from HML to conventional for buy and hold can be a bit of a trick. The one good thing though is that typically the HML requires your LTV to be extremely conservative (70% or better). So that means you're more than likely good to go with the bank when you refi.

However, the trick to getting the refi through is the seasoning requirement. Thats the problem you're going to run into. You need the bank to take the appraisal value for the LTV calculation as opposed to your purchase price.

Some banks won't calculate the LTV of the loan off the appraisal value until you've owned the property for a year. Some, its 6 months. And a small few, there's no seasoning required at all.

Now if you want to do a commercial loan with a local bank, most of them will have no seasoning at all.

I was doing hard money deals and converting to conventional early on. Up to 4, it easy. Once you get over 4, things really get difficult. And once you get over 10, you're going to be out of slots for a conventional and will have to do commercial.

Doing the 5 to 10 loans was a huge pain in the neck. I had a couple of them fall through at the very last minute and had to restart the refi process again. And that was tying up my financing spot so it really hamstrung me quite a bit.

The key is to line up your end loan first. Explain to the banks what you are trying to do and find out which ones have the best terms (i.e. shortest amount of seasoning) and see which ones will do it at all.

Then work backwards from there and you should be fine. Again 1 to 4 properties the refi is easy. 5 to 10 properties and its difficult. In fact, I'd recommend looking at commercial loans after you hit 4. I've only got 7 conventional and stopped doing them because they were too big a pain in the neck and tied up my financing spots for way too long.