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What Is a Seasoned Refinance?

For most people, the idea of seasons as it applies to real estate often means times of year that are most advantageous to buy. However, there's another important kind of seasoning—the kind that applies to financing or refinancing an investment property. But the stipulations and limitations of this process aren't always clear. So, what does seasoning mean, how can it apply to real estate investing, and how can you best make it work for you and your hard money loan?

What Is Seasoning?

As with the seasons in a year—spring, summer, fall, and winter—seasoning in real estate relates to the passage of time. Seasoning generally refers to the duration of payments made on an investment, like a property loan. A seasoned property has been held for at least six months.

In other cases, seasoning can relate to the amount of money in an account and how long it's been there. Money deposited shortly before an attempt to take out a loan or refinance an existing loan can raise red flags. However, money that has had time to season within an account can reassure lenders that cash on hand is real.

Seasoning isn't relevant with investment property loans with fifteen or thirty-year terms. Still, in other situations, like in the case of hard money loans with shorter terms, seasoning can make or break an investment's future. In some instances, seasoning is unavoidable and even beneficial. However, it's best to know how seasoning functions in the eyes of lenders to understand how it may impact your rental property aspirations as a real estate investor.

The Lender Benefits of Seasoning

A seasoned investment with a history of regular, timely payments says a lot about the borrower's financial credibility. No missed payments, late payments, or insufficient payments speak to their stability, which means lenders will be more likely to offer refinancing opportunities at desirable rates.

Most hard money lenders won't consider allowing a refinance of any kind without three to six months of seasoning, ideally longer. As such, it's essential to be mindful of seasoning requirements to make wise or necessary investment choices.

When Seasoning Doesn't Apply

However, despite the benefits, not all lenders will require seasoning for cashing out or refinancing a hard money loan. However, to qualify, these lenders may have stricter requirements for investors, like a higher credit score, a higher loan-to-value ratio, or high interest rates for a cash-out refinance.

In addition, lenders may waive seasoning requirements if they can be sure your property will drive income, like a signed lease for a rental home.

The Investor Benefits of Seasoning

Seasoning may also offer several benefits for real estate investors, particularly those who may not qualify for refinancing under a lender without the requirements. In this case, waiting a little longer to refinance a hard money loan can mean better interest rates, fewer hoops to jump through, more equity and time to build up the kind of loan-to-value ratio lenders want to see, which is usually around 25% to 30%.

While not right for all investors, those who are prudent with their money or aren't in a hurry to carry equity from one investment into another won't be negatively impacted by playing along with lender guidelines. This is especially true for investors who are pausing purchases to wait for housing prices to drop or who have cash on hand to invest in another property without needing to tap into equity from an existing rental.

Seasoning and BRRRR

For some real estate investors, seasoning isn't a serious point of consideration. However, for others, it can play a critical role. This is most notable for investors who favor the BRRRR strategy or Buy, Rehab, Rent, Refinance, and Repeat. Using this strategy, investors:

  • Buy a property, usually with a hard money loan or other short-term lending product
  • Rehab the property to appeal to high-paying tenants
  • Rent the property out for as much as the market allows
  • Refinance the property to access the equity
  • Repeating the process using the equity obtained from the first property to start the process over again

For investors with adequate cash and a savvy approach, a seasoning period should be considered part of your long-term growth strategy. For example, an investor takes out a $50,000 hard money loan to buy a fixer-upper property and invests $20,000 into the renovation process. Should the market improve, or the renovations result in a new valuation worth $90,000, the investor has put $70,000 in cash into the property but has an additional $20,000 in forced equity.

Should there be a seasoning period of six months to cash out refinance, the investor can complete this cycle twice within a year. This would result in two properties owned at a value of $180,000 in the market, each with the ability to generate rental income.

However, this seasoning period could hold back potential purchases in some cases. If, for example, the seasoning period was eliminated and the investor could complete three cycles within a year instead of two, this would result in an additional $90,000 of equity in their portfolio in the same amount of time, in addition to the opportunity for additional rental income.

While the actual logistics of BRRRR, particularly in volatile markets, are rarely so simple, it's clear that savvy investors not beholden to a seasoning period have additional growth opportunities—assuming, of course, they meet a lender's potentially stricter policies surrounding cash-out refinancing.

Evaluating the Pros and Cons of Seasoning

The circumstances surrounding a seasoned refinance will differ from investor to investor and strategy to strategy. If you're not sure whether to make seasoning a factor in weighing lenders or whether seasoning will play a role in any of your investment activities, keep the following points in mind:

  • What are your long-term goals as an investor?
  • Do you need access to equity sooner than a standard seasoning period would require?
  • Are you using a strategy like BRRRR that could benefit from quick refinancing?
  • Do you have cash on hand that has been adequately seasoned?
  • Can you meet the higher requirements for banks and lenders who may be willing to waive seasoning?
  • How will you proceed should the market shift between purchase and disposal?
  • Will you be able to attract renters to your property quickly enough to demonstrate income streams?
  • What are the terms of your hard money loan?

Whether seasoning requirements make a difference in the use of hard money loans will vary from one person to another. Be sure you understand the ways in which seasoning may apply to you before making decisions as a real estate investor, from investment strategy to hard money loan opportunity.


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