Exit Strategy

Q: Can I exit my loan before its terms are up?

Some lenders impose a prepayment penalty if you pay off a loan early—but Source Capital does not. We never charge prepayment penalties on our hard money loans.

Q: What happens if my hard money loan exit strategy fails?

If you cannot repay your loan, you may encounter:nn• Extension fees: Lender-approved loan extensions usually come with additional fees.nn• Higher interest rates: An extended term often carries a higher interest rate due to increased risk.nn• Foreclosure: If you default and no alternative is available, the lender may foreclose and take ownership of the property.

What Is an Exit Strategy?

A loan exit strategy is a borrower’s plan to pay off a loan. Traditional loans have a very clear exit strategy. The borrower pays off the loan plus any interest over an agreed-upon number of years in monthly or twice-monthly payments. With short-term loans like hard money loans, however, exit strategies can be more complex.

Hard money loans require much more clearly defined exit strategies than traditional loans because:

Their terms are shorter: Paying off a hard money loan through regular monthly payments over 12 to 24 months isn’t practical for most. Monthly payments could be upwards of tens or even hundreds of thousands of dollars.
Their structure is different: Most hard money loans are structured with interest-only payments throughout the loan term with a balloon payment at the end. The balloon payment can be substantial, up to several million dollars, so lenders require a clearly-defined exit strategy at the outset to ensure the borrower can pay back the loan.

How Does an Exit Strategy Relate to Hard Money Loans?

Your hard money loan exit strategy plays a key role in your loan application. A strong and feasible exit strategy may make the difference between a loan approval or rejection. It can also result in better loan terms or a higher loan amount.

How an Exit Strategy Works

Considering a hard money loan for your next investment property? Here’s what to expect when it comes to the exit strategy for your hard money loan:

Step 1: Draft the exit strategy

Clearly outline your plan to repay your loan. Be as specific as possible and be sure to include figures and a well-defined timeline. In some cases, it may help to have a backup exit strategy, too.

Step 2: Submit the exit strategy

Your lender will assess your strategy and its feasibility during underwriting.

Step 3: Receive loan details

Your loan’s terms will be drafted according to your exit strategy, among other details.

Step 4: Execute the strategy

You’ll need to do this within the terms of your loan to obtain the necessary funds.

Step 5: Pay off the loan

Finally, pay off the loan with the funds you raised through your exit strategy.

Real‑World Scenarios

Exit strategies can take a number of different forms. Let’s review some of the most common exit strategies.

Sell a Fix-and-Flip

One common hard money loan exit strategy method is to sell off an asset to secure the loan repayment funds. In the case of a fix-and-flip, a borrower takes out a loan to buy and renovate a home. Their exit strategy is to sell the home within the terms of their loan for at least as much as their loan is worth, and ideally more. They’ll use the funds from the sale to pay off their loan.

Refinance to a Traditional Mortgage

In many cases, borrowers with less-than-ideal finances are unable to secure traditional mortgages and turn to hard money loans, instead. An exit strategy in many of these cases is to spend the loan term improving their creditworthiness, then refinance their loan to a traditional mortgage. To do so, they’ll take out a new mortgage and use the proceeds of that mortgage to pay off their hard money loan.

Exit Strategy FAQs

What are common exit strategies?

Exit strategies for hard money loans typically fall into the following categories:

Sell the property: This strategy is most commonly used in fix-and-flips and other investment properties that are expected to dramatically increase in value.

Sell another asset: In some cases, it may make more sense to sell off another asset to repay the loan. For instance, a bridge loan helps borrowers secure funding to buy a new property when they haven’t sold off their original property. In this case, the funds to pay off the loan on the new property will come from the sale of the old property.

Refinance: For those who can’t qualify for a traditional mortgage, a hard money loan can buy a few years to improve their creditworthiness. The exit strategy in this case is to refinance into a traditional mortgage at the end of the hard money loan and use the new mortgage to pay off the old.

Use rental income: In some cases, your exit strategy may include the projected future rental income from your property.

Which is the best hard money loan exit strategy?

There’s no single best hard money loan exit strategy. To determine which strategy is the best for your needs, it’s important to consider your project type, timeline, the market, and other factors. This can help you determine your most realistic and feasible exit strategy.

What components should I include in my exit strategy?

When drafting an exit strategy, include the following components:

Intended strategy: Detail which strategy you’ll be using to pay back your loan.

Timeline: What goals do you need to hit at which points to ensure your exit strategy works?
Renovation plans: If you plan to renovate the property, detail your plans and your expectations surrounding your property’s flipped value.

Market comps: If your exit strategy includes selling or renting out a property, include comparable properties in your area and their sales or rental prices.

Refinancing details: If you plan to refinance into a traditional loan, include the terms of your new loan and your clear path to get there.

Backup plan: Adding a second or even third feasible plan can boost your lender’s confidence in your ability to pay back the loan.

Can I exit my loan before its terms are up?

Some lenders may charge you a prepayment penalty if you pay back your loan before its term is up—but Source Capital won’t. We never charge prepayment penalties on our hard money loans.

What happens if my hard money loan exit strategy fails?

A failed exit strategy is a worst-case scenario for most, but it doesn’t have to be the end of the world. If you are unable to repay your loan, you may expect:

Extension fees: In some cases, your lender may be willing to extend your loan, but it is likely to cost you.

Higher interest rates: Your extended loan may also result in a new, higher interest rate due to your increased loan risk.

Foreclosure: If an alternative isn’t available and you default on your loan, your property may go into foreclosure. In this case, your lender will take over ownership of your property.

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