Hard money loans are a great way to get into the world of real estate investments. These loans don’t have as stringent of income or credit score requirements, so they’re a great option for many borrowers. However, the duration term is much shorter than conventional loans and hard money loans usually have higher interest rates as well. That’s why it’s important that you have exit strategies in mind to pay off the loan when necessary before you take out a hard money loan. Here are some hard money loan exit strategies you may want to consider.
Sell the Property
One of the most common exit strategies for hard money loans is to sell the property. This is a common option because many borrowers using hard money loans in Texas do so with the purpose of purchasing a property, improving it, and selling it for a profit. Most borrowers are able to use the loan for costs associated with renovating or rehabilitating the property, so it’s generally not too difficult to pay off the loan this way. This strategy is only successful if the borrower has planned and has the investment knowledge and expertise to know which properties can maximize profit. Some lenders may offer an extension of the loan if the renovations aren’t complete before the property needs to be sold.
If the investor’s plan wasn’t to flip a property but to use it for a rental property, refinancing is a good option. Since this strategy will provide a longer-term stream of income rather than one lump sum, refinancing with a traditional lender can ensure the original loan is paid off. Hard money loans can also be used as a bridge between applying for and being approved for another loan that you intend to use for a longer period of time.
Get New Loan
You may also be able to get an additional hard money loan, but this is usually only recommended when all other options have been exhausted. This is simply because using another hard money loan diverts it from the purpose that it was originally intended for, but it can help you buy some time or avoid foreclosure.
If your plan is to stay in the property purchased with a hard money loan, a great exit strategy is to secure a traditional mortgage. A hard money loan can allow you time to build up credit or pay down debts to lower your debt-to-income ratio. You can use the 1-3 year time period of a hard money loan to raise your chances of getting a traditional mortgage.
If you’re unable to qualify for a traditional mortgage, you can consider a subprime mortgage. Although the terms aren’t as favorable as a traditional mortgage, it can provide the funds to exit the hard money loan and provide long-term financing for the property, whether you’re planning to use it yourself or rent it out.
Use Business Capital
Finally, consider using business capital to exit your hard money loan. This can be income from other properties, other investors you have, or your business. A hard money loan can help you buy time to find this capital or to locate other investors.
Whatever exit strategy you intend to use, make sure you have backup plans to prevent defaulting on your loan. To learn more about hard money loans and exit strategies, contact Investor Loan Source today.