How difficult is it to refinance?

Question

Hello, BP! I'm a new member - this is my first post. I've recently been diving into the world of real estate investing, trying to familiarize myself with the terms, different financing options, etc.

I have a question about the strategy I've been reading about wherein one gets a private lender for a short-term loan (say, 1 year)  at a high interest rate (say, 12%) and then refinances the home to pay off the lender at some point during that year.

I assume that a) the borrower is going the private-lender-route because he/she can't get a traditional bank loan and b) when the borrower goes to refinance, he/she is seeking a new, traditional (i.e. bank) loan.

My question is: if the buyer couldn't get a bank loan to purchase the house in the first place, can he/she count on a bank being willing to refinance after 1 year? Is it much easier to get refinancing than to get an original mortgage loan?

Thanks!

Ben Stoodley · Answer

Hi Megan S. and welcome to BP!

Hard Money is a great option for all investors looking to acquire properties quickly. If the investor's investment goals are only 1-2 flips/acquisitions per year, than they can likely can go conventional route. Conventional loans have many more requirements, including borrower credit and financials, as well as nicer "move in ready" property requirements. This makes it a hard match as most "good deals" require a decent amount of work. Plus, the borrower requirements are quite stringent.

HML on the other hand are all asset based, no min credit or financial requirements (and if there are some, they are very low requirements). This means the stronger the deal you present to a HML... the better the loan they can provide you. It is done quickly and easily, closed within a few days and the renovations are also covered by the HML. Typically HML covers up to 85% of purchase price + 100% of rehab (or some variation there of).

With high interest rates, the refinance into a conventional loan on Buy n Hold properties is key. This can be done within 6-12 months usually. Check to make sure there isn't a prepayment penalty with the HML. Then make sure you have spoken to your conventional loan broker so you two have a plan of action for when it's time to refinance.

Hope this helps, good luck!

Chris Mason · Answer

You get dang clear on exactly WHY you can't get institutional money, and put a 100% solid plan in place to address that.

• For bruised credit folks, the FICO score never seems to do what they want it to do when they want to do it, so I'd advise against considering any such FICO plan to be "100% solid."
• By contrast, if the reason you can't get institutional money is because the place doesn't have a kitchen yet, and you have the cash to fix the kitchen provided you keep some in your pocket by getting a HML, that is something that you have pretty dang close to 100% control over.
• Zoning is a huge grey area. You need to have a backup plan for when the city says "no, sorry" to your rezoning proposal.

The basic standards for a refinance mortgage are not different from those for a purchase mortgage. The only big difference is that there is typically no down payment requirement on a refinance, because your equity typically serves in its place.

Brian Garrett · Answer

@Chris Mason Do you have any suggestions for my particular situation being that you're an experienced lender? I also made this thread with more detail:

https://www.biggerpockets.com/forums/67/topics/427402-brrrr-without-proof-of-income

Chris Mason · Answer

Compared to hard money where there are multiple points upfront typically, a refinance into an Agency loan is dirt cheap.

Kevin C. · Answer

Doesn't a refinance in 6-12 months cut significantly into ROI since you pay lender fees for the first loan and then again on the refinance? Or do refinance loans have much lower fees typically?

I've always wondered to the BRRR strategy can turn a worthwhile profit.

Brian Garrett · Answer

@Megan Scheminske I'm in a similar situation. My credit score is fine I just can't show proof of income therefore I'm not sure how I'll get my conventional loan for the original mortgage or even if I paid cash for the property I'd still be stuck in the same place as you trying to figure out how to refinance it.  If I couldn't get the conventional loan in the first place and needed to pay cash for the property then why would I suddenly be able to qualify for a loan to refinance?

Megan S. · Answer

Thanks, Shella! What happens in the scenario the borrower can't find a bank to refinance? How does one mitigate against this risk (i.e. if I was going into a deal as the borrower, what factors would I consider when determining my chances of successfully refinancing)?