If you previously had a low credit score, could not verify your income, or potentially other circumstances, you may have found yourself only able to obtain a mortgage with a higher interest rate or other unfriendly terms. Many borrowers may not realize it is possible to refinance, and even take cash out, into a mortgage with better terms.
What is “Hard Money” or “Subprime”?
“Hard Money” is an industry term used to describe a lender who will provide a mortgage to borrowers who do not qualify with a conventional lender. As an example, if the borrower has low credit scores or has had a bankruptcy, conventional lenders will not qualify them for a mortgage. Such borrowers’ credit is sometimes referred to as “Subprime”. As a result, they usually pay higher interest rates than “prime” borrowers, and/or they may not be able to borrow as much against the value of their property. Where a prime borrower can typically borrow 80%, 85% and 90% of the value of their house, many hard money lenders will only lend 60% or even 50% of the value. Another reason a borrower might end up with a “Hard Money” loan is that they were not able to prove how much income they made. This is especially true for independent contractors and small business owners who don’t earn their income on a W2. These borrowers might also deduct many legitimate business expenses on their tax returns making it look like they earn much less than they actually do.
How to get out of a “Hard Money” or “Subprime” Loan
One of the most important things to do to qualify for better mortgage terms is to pay all your debts on time. It is especially important to do so for your current mortgage. Many “Hard Money” borrowers who pay their debts and mortgage on time for 24 months or more find that they may qualify for better terms on a new mortgage. It is also important to be able to document how much income you earn. Lenders like Sierra are comfortable examining a borrowers bank statements over the last 12 to 24 months to determine and verify income instead of relying on tax returns or W2s.
Can I take Cash Out When I refinance?
As mentioned before, “Hard Money” lenders typically only loan 50-60% of the homes value. But by refinancing with better terms due to improved credit, it is possible to borrow as much as 80% of the loans value. This can provide the opportunity for a borrower to get cash out of their home and use it remodel or improve the home, or pay off other debts.
Adjustable vs Fixed Rates
Many times, “Hard Money” loans are Adjustable Rate Mortgages (ARM). These mortgages are often designed to dramatically increase the interest rate charged when the loan adjusts a few years later. A higher interest rate means a higher monthly payment, which can be an unwelcome surprise. This increase can happen even if interest rates overall have not changed! For this reason, it may make sense to refinance to a Fixed Rate Mortgage where the interest rate, and the payment, stays the same over the life of the loan, even if overall interest rates increase.
Over the last 24-36 months, interest rates have generally declined. In fact, they are the lowest in two years! Borrowers may not know that after paying their mortgage on time over this time, they have improved their creditworthiness. This might allow them to re-finance their “Hard Money” loan into a loan with an interest rate that is significantly lower than their current loan. This can save a borrower hundreds and in some cases even thousands of dollars a year. In some cases, borrowers are able to refinance to a lower interest rate, take cash out, and still have a lower monthly payment than they had before!
Must I live in the home?
The short answer is “No”. Cash-out refinancing can be provided for primary as well as secondary homes. The key is getting your credit improved to qualify for these much better terms.
As you can see there are easy ways for folks to refinance a “Hard Money” loan.