Refinancing a hard money loan

[Steve Rogers]

Hi, I'm interested in taking out a hard money loan to fix up my house.  I know that they have usually have interest rates around 15%.  The reason I'm looking into this is because I won't qualify for a second mortgage

My house needs repairs and I also have a credit score around 600

I was going to take out a hard money loan for 65K, pay the interest for the next 8-10 months and once my credit score is in the mid to high 600's and my house is fixed up, would a bank refinance my hard money loan? Pay off that 65K and I would just make payments to them instead? 

My house is paid off and fixed up it's worth around 100-110k

[Maria Stewart]

Congrats on your decision to buy a property!

I have used Hard Money to purchase and renovate a number of my rental properties (and some flips) and I work with investors who use this medium to reach their goals. I'll give you my professional and personal opinion so you can make an educated decision.

The one mistake I have seen people make repeatedly is obtaining a hard money loan without the "get out" plan. Hard money interest (as you just mentioned) is much higher than traditional. The best case scenario is to have a refinancing bank standing at the ready BEFORE you get that hard money loan. A lot of things can happen between now and 8-10 months from now. You really don't want to lose the property (especially if you renovated it) to the bank because of lack of payment). Most hard money lenders I have worked with have a 6 month loan with the option to extend 1-2 times for 1-2 months. Each extension required a sizable "fee" of $500+ (I would look into the terms carefully with hard money lender before proceeding).

My advice: Shop around with refinancing banks and tell them your situation. Find one that will refinance you with credit as is. If they can't, find out the score needed (which may be 620 for example). Only obtain that hard money loan once you have a bank that will work with you on the back end. You may also want to discuss with the refinancing bank your renovation plans and expected home value BEFORE you start to ensure you don't 1) over develop, 2) values are in line with their value numbers. Have your agent run comps in the area with features you expect to include once your renovations are complete. Some banks would even allow you to use their appraiser to value the property and the "after" renovation estimate and tentatively sign off on approving your refinance (contingent on your finances, credit score and renovation plans). Using their appraiser is important because for THAT bank, it is the only appraiser's opinion that matters.

Now  once you have that in place if you want to wait to refinance for 8-10 months, fine. Me? I have done my hard money loan and refinanced the very next month after renovations are done to avoid several months of high interest payments. 

Good luck!

Maria