To get out of a hard money loan, you refinance into longer-term financing, sell the property, or negotiate an extension with your lender. Most borrowers use one of those three exits because hard money loans are built as temporary financing: interest rates commonly run 8% to 14%, terms are measured in months, and a balloon payment sits at the end. Exiting isn’t a crisis. Missing the maturity date is. Everything below assumes you start planning the exit weeks, not days, before that date arrives.
Pull These Documents First
Every exit needs the same core paperwork, so gathering it early saves you regardless of which route you pick.
Request a payoff statement from your lender. It shows exactly what you owe through a specific date, including accrued interest, fees, and the daily interest charge that keeps accumulating until funds arrive.1Consumer Financial Protection Bureau. What Is a Payoff Amount and Is It the Same as My Current Balance? For loans secured by a dwelling, servicers must provide an accurate figure once you ask.
Get a current appraisal to establish your equity. Conventional refinance lenders generally want the loan-to-value ratio at 80% or lower, meaning at least 20% equity. If you’re refinancing, have two years of federal tax returns ready and current profit-and-loss statements if you’re self-employed.
Then read your original promissory note. Hard money notes frequently include a guaranteed-interest clause requiring a minimum number of months’ interest regardless of when you pay off. Knowing that number now prevents a surprise at closing.
Refinance Into a Conventional Mortgage
Refinancing into a traditional mortgage is the cleanest exit if you plan to hold the property long term. It replaces a short-term, interest-only obligation with an amortizing loan. The trade-off: conventional lenders examine your finances much more closely than the hard money lender did.
Fannie Mae requires a minimum credit score of 620 for fixed-rate conventional loans, and scores above 740 unlock the best pricing.2Fannie Mae. General Requirements for Credit Scores On income, manually underwritten loans cap total debt-to-income at 36%, though borrowers with strong credit and reserves can qualify up to 45%. Loans run through Fannie Mae’s automated system can be approved with DTI as high as 50%.3Fannie Mae. Debt-to-Income Ratios
The property gets scrutinized too. If you bought a fixer-upper with hard money and renovations aren’t complete, it may not meet the habitability and safety standards conventional underwriting demands. A title search confirms no surprise liens exist, and you’ll need homeowners insurance and likely an escrow account for taxes before the new loan closes.
Plan on four to six weeks for underwriting. Don’t wait until the last month of your hard money term. Lenders move slowly, and a late closing means paying extension fees or risking default.
Use a DSCR Loan for a Rental Property
Investors who bought rental property with hard money often can’t qualify for a conventional refinance because the property isn’t owner-occupied or their tax returns don’t show enough personal income. A debt service coverage ratio loan qualifies the property on its rental income instead of the borrower’s personal finances.
The DSCR is the property’s monthly rental income divided by its monthly debt obligation. Most lenders want at least 1.0 to 1.25. A ratio above 1.25 unlocks better rates and higher leverage. Credit score minimums typically fall between 620 and 680, and down payments run 20% to 25%. Some lenders will finance a property with a DSCR below 1.0 if you put down 30% or more.
Watch the prepayment penalty. DSCR loans commonly include a step-down structure over three to five years. A typical five-year version charges 5% of the loan balance in year one, 4% in year two, and so on down to 1% in year five. That’s fine if you’re holding the property. It’s expensive if your plan involves another refinance or a flip within a couple of years. Negotiate the shortest prepayment window the lender will offer, and confirm the structure before you close.
Sell the Property
Selling is the most direct way to eliminate the loan. The title company handles the mechanics: it receives the payoff letter, collects the buyer’s funds at closing, wires the payoff to the hard money lender first, and sends you whatever equity remains. The lien clears from title as part of closing.
Timing is where this gets tricky. The sale has to close before your loan matures, and real estate deals routinely slip by weeks. If the loan expires before the sale closes, you land in default, where interest rates can spike and penalties kick in. Build in a buffer by listing well before the maturity date. If closing is going to be tight, negotiate a short extension with your lender preemptively rather than hoping the timeline holds.
Watch the Short-Term Capital Gains Rate
Hard money loans usually fund short-term projects, so the property is often sold within a year of purchase. A sale within 12 months triggers short-term capital gains, taxed at your ordinary income rate rather than the lower long-term rate.4Internal Revenue Service. Topic No. 409, Capital Gains and Losses For high earners, that rate can reach 37%. A flip that looks profitable at the closing table can shift considerably once you account for taxes plus the hard money interest paid throughout the hold period. Use your actual tax rate when checking whether a deal still makes sense.
Negotiate an Extension
When the refinance isn’t ready and the property hasn’t sold, an extension buys time without triggering default. Hard money lenders are generally open to extensions because they’d rather collect fees than foreclose. Typical extension fees run 1% to 2% of the outstanding principal, paid upfront or added to the balance.
The lender will want to see real progress toward a permanent exit. An active listing agreement, a pending refinance application, or evidence that renovations are nearly complete all strengthen your position. Without a credible plan, the lender may refuse the extension or demand harsher terms.
Get everything in writing before the original maturity date passes. The extension agreement should state the new maturity date, confirm the interest rate, and specify any additional fees. Once you’re past maturity without a signed extension, the lender has the contractual right to declare default and begin foreclosure. Hard money lenders are often small operations where the relationship feels informal, and a phone call saying “we’ll work with you” creates a false sense of security. If it isn’t in a signed agreement, it doesn’t protect you.
Distressed Exits: Short Sale or Deed in Lieu
When the property is worth less than you owe and refinancing isn’t available, you’re looking at distressed exits. Neither is painless, but both are better than an involuntary foreclosure.
Short Sale
A short sale means selling for less than the outstanding balance with the lender’s written permission. The lender agrees to release its lien even though sale proceeds won’t cover the full debt.5Consumer Financial Protection Bureau. What Is a Short Sale? Approval requires showing that the property’s market value has genuinely dropped and that you can’t cover the shortfall. Expect the lender to order its own valuation and take weeks or months reviewing. Short sales are slow, so you’ll likely need an extension or forbearance running in parallel.
Deed in Lieu of Foreclosure
A deed in lieu is simpler. You hand the property title to the lender, and the lender cancels the debt, avoiding the cost and public record of a formal foreclosure.6Consumer Financial Protection Bureau. What Is a Deed-in-Lieu of Foreclosure? The critical detail: make sure the agreement explicitly releases you from any remaining deficiency. If the property is worth $300,000 and you owe $400,000, you need written confirmation that accepting the deed satisfies the full $400,000. Without that language, the lender could accept the property and still pursue you for the $100,000 gap.
Taxes on Forgiven Debt
When a lender cancels part of what you owe, the IRS generally treats the forgiven amount as taxable income. If a short sale leaves $50,000 unpaid, or a deed in lieu writes off the difference, you may receive a Form 1099-C reporting that amount as canceled debt. The $600 threshold for issuing a 1099-C is low enough that virtually any settlement triggers one.7Internal Revenue Service. Instructions for Forms 1099-A and 1099-C
Federal law provides exclusions that can reduce or eliminate the hit:
- Insolvency exclusion. If your total liabilities exceeded the fair market value of your assets immediately before the debt was canceled, you can exclude the forgiven amount up to the extent of your insolvency. Claim it by filing Form 982. If you were insolvent by $60,000 and $50,000 of debt was forgiven, you can exclude the full $50,000.8Office of the Law Revision Counsel. 26 USC 108 – Income From Discharge of Indebtedness
- Qualified real property business indebtedness. If you’re not a C corporation and the canceled debt was incurred to acquire, construct, or substantially improve real property used in a trade or business, you may elect to exclude the forgiven amount. The trade-off is a matching reduction in the tax basis of your depreciable real property, so you’ll pay more tax when you eventually sell.8Office of the Law Revision Counsel. 26 USC 108 – Income From Discharge of Indebtedness
- Bankruptcy. Debt discharged in a Title 11 bankruptcy case is excluded from income entirely.8Office of the Law Revision Counsel. 26 USC 108 – Income From Discharge of Indebtedness
One misconception among real estate investors: the qualified principal residence exclusion doesn’t apply to flips or rentals. It covers only debt on your primary home, and for 2026 it has expired for new discharges unless Congress extends it.8Office of the Law Revision Counsel. 26 USC 108 – Income From Discharge of Indebtedness For most hard money borrowers, insolvency and qualified real property business indebtedness are the relevant exclusions. Both require careful documentation and a tax professional who understands real estate.
What Happens If You Do Nothing
Default on a hard money loan moves fast compared with a conventional mortgage. These are asset-based lenders whose business model depends on recovering capital through the collateral. When payments stop or the maturity date passes without a payoff, the loan typically enters default after a cure period of 30 days or less, depending on your note.
Once you’re in default, consequences compound:
- Default interest rates. Many hard money notes include a default rate dramatically higher than the contract rate. Rates in the mid-to-high 20% range are not unusual in commercial loan documents, though enforceability depends on state usury laws.
- Late fees and penalties specified in the note, typically accruing immediately upon default.
- Foreclosure. In states allowing non-judicial foreclosure, the lender can begin without going to court, and the timeline from default to auction can be as short as a few months.
- Deficiency judgments. If the property sells at auction for less than you owe, the lender may pursue you for the remaining balance. Roughly a dozen states have anti-deficiency laws that limit this for certain residential loans, but most states allow deficiency judgments on investment and commercial property.
You also have fewer federal consumer protections than you may expect. Regulation Z under the Truth in Lending Act exempts loans made primarily for business, commercial, or agricultural purposes, and loans made to entities like LLCs rather than individuals.9eCFR. 12 CFR 1026.3 – Exempt Transactions The Real Estate Settlement Procedures Act specifically exempts bridge and swing loans even when secured by residential property,10Consumer Financial Protection Bureau. Coverage of RESPA so the 120-day pre-foreclosure waiting period that protects conventional mortgage borrowers doesn’t apply.11Consumer Financial Protection Bureau. 12 CFR 1024.41 – Loss Mitigation Procedures The protections you have are whatever you negotiated at origination plus whatever your state’s foreclosure procedure requires. Read your note carefully.
Closing Out the Loan Cleanly
Once you have a refinance, a sale, or funds in hand, execute the payoff with precision. Wire the exact amount on the payoff statement to the account the lender designates. The figure changes daily because interest accrues, so confirm the per-diem and make sure the wire arrives on or before the good-through date.1Consumer Financial Protection Bureau. What Is a Payoff Amount and Is It the Same as My Current Balance?
After the lender receives payment in full, it must file a document with the county recorder’s office releasing its claim on the property. Depending on the state, that document is called a satisfaction of mortgage, a release of lien, or a deed of reconveyance. Follow up with the recorder’s office after 30 to 60 days to confirm the release was recorded. If it wasn’t, contact the lender immediately. An unreleased lien can block a future sale or refinance, and the longer it sits, the harder it becomes to fix. Keep a copy of the recorded release permanently.