Paying off a hard/ private money lender?

Question

I was wondering if anybody, in the most Real Estate for Dummies way possible, could walk me through the process of paying off a private/ hard money loan using a conventional mortgage?

(Forgive me for this next part, I'm trying to understand this process and have not been able to find the answers I need!)

For clarification, I buy a house that does not qualify for a regular ole 30-year mortgage right? Let's say it has a foundation issue. I have a private party pay for the house. Before my balloon payment after a year or so, this property would now qualify for a conventional mortgage! Yay! Can I get a mortgage on this place to pay off the lender and then keep the property for myself as a rental?

Someone, anyone, please hold my hand and walk me through this process and tell me anything I need to know. Thank you!

Nick Belsky · Answer

@Bridget Huebner

Most HML do not have a seasoning period.  They are short term loans that do not normally come with any PPP.

Paying off the HML is as simple as asking the HML for a payoff statement.  They will provide it to you and you give that your lender.  The lender and title company will take care of the rest.  Just don't forget to make your payments until you are told to stop!

Conventional rates on investments are a bit high right now.  Still lower than DSCR but not by too much.  You don't need an LLC to get a DSCR loan.  It is an option, however.  I ran a scenario earlier this week where the conventional investment rate was par (no points) at 3.650%.  The best DSCR rate I could find was 3.750%.  The conv can be bought down lower if desired, the DSCR was at base and no points can be bought.  This is not the norm, usually the gap is closer to 1 point, but many of the Non-QM and Commercial lenders are pushing DSCR products right now to compete with conventional.

Cheers!

Jessica Tsao · Answer

@Bridget Huebner

Hey no worries, yes you can do a DSCR loan on single family home. You can set up an LLC for liability reasons. but it is not required.

Jessica Tsao · Answer

@Bridget Huebner

There are definitely options with a DSCR loan, but if you qualify for conventional which does require seasoning as both Matt and Cris stated is always most cost effective.

Since not a lot of people know about DSCR loans, these loans are using your property rental income as qualifying to repay the loan.  Not your income and will not be on your personal credit if you use your LLC, I have done DSCR loans without seasoning right after you purchase but it depends on LTV though.

Hope it helps! And a shout out from California

Cris Normandt · Answer

HI Bridget, Matt is absolutely correct. You have to figure out the seasoning period needed in order to get out of the HML. If you get into a loan that has 10-12% interest and find out you have to wait longer than anticipated to refi out you are burning cash like crazy. Make sure to do your due diligence and get your financing for the refi in order.

Bridget Huebner · Answer

@Jessica Tsao Perfect! I have been weighing the pros and cons of having an LLC and I think it would make sense to wait until I have at least 3 rental properties, or after I have my first multi-family home to get an LLC.

I'm so grateful for your help, thank you for your time!

Bridget Huebner · Answer

@Steven Goldman

Thank you for the good info! I will be learning more about these real estate based banks for my future investing!

Steven Goldman · Answer

Your best bet is a real estate based bank they have the lowest rates. If you do not qualify for a bank loan than there are a myriad of funding companies who calculate LTV on debt service coverage. They have 30 year fixed options. They are 1  1/4 to 3 points higher than the bank depending on your credit score the debt service coverage and the type of property. Good luck with your refinance.

Bridget Huebner · Answer

@Jessica Tsao

Thank you for your response! I've never considered a DSCR loan before so I'm going to do my research! Would I be able to do a DSCR style loan on a single family home if I do not have an LLC?

Forgive me, I've learned a lot but am only about 3 months into learning about what real estate is going to do for me.

Matthew Crivelli · Answer

Once the property is fixed up and you wait out the seasoning period you should be able to refi. You could use private money for the 30 year product too. Conventional rental loans are slow and almost the same price point as a DSCR Loan from the private side, oh and the seasoning period is usually half (90 days). You have options here.

Paying off a hard/ private money lender?

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