What Is the Difference between Hard Money Loans vs. Fix & Flip Loans?

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Whether you are an experienced real estate investor or a first-time buyer, hard money and fix-and-flip loan options may have come to mind when trying to get fresh money in real estate amid the current liquidity crunch in the credit markets. While they may seem similar at first glance, some key differences between them can affect your decision-making process.

Let’s break down each of them and explore which option might be best for your real estate investment goals.

What Is a Hard Money Loan?

Hard money loans are short-term financing secured by real property and often used for real estate transactions. These short-term loans are an easy way to raise money using property as collateral The loans are appropriate for speedy transactions needed in the real estate industry, instead of going through tiresome bureaucracies in banks.

Unlike traditional lenders, hard money ones provide loans based on the property value you want to purchase. This property-driven process allows most lenders to approve the loans within 2 to 5 days.

What Are Fix & Flip Loans?

Fix & flip loans are just another way of getting fresh money with real estate as collateral and investing it in inexpensive property that needs repairs, funding those renovations, and raking in profits after reselling it within 12 to 18 months. Traditional lenders often perceive house-flipping as a risky business, which is why investors prefer acquiring this type of flexible loan that lets them receive the money within days.

Zooming In on the Differences

Although both short-term credit products are almost similar—they provide private money to invest in property and have real estate as collateral—they differ in the regulations and requirements that burrowers abide by. Hard money has fewer guidelines and criteria than fix-and-flip loans. Unlike the latter, hard money borrowers are unlikely to go through full underwriting and minimum FICO requirements. House-flipping also requires knowing Home Owners Association regulations.

Since the property itself is used as the only protection against default, foreclosures, or collections, many private lenders offer between 65% to 70% loan-to-value ratio (LTV). The LTV ratio of the property determines how much the borrower should pay as a down payment.

The lender also assesses risks through LTV and after-repair value (ARV) ratios. These are useful to gauge the loan size a lender will offer for a home rehabilitation project. House flippers look closely at ARV to determine their profits, so the renovation project doesn’t surpass the expected returns.

Depending on the borrower, a fix & flip loan can have the option to customize repayment schedules and gradual withdrawals as work is completed.

In short, if you need financing quickly and have a property that has a high ARV, a hard money loan may be the best option for you. On the other hand, if you’re planning a renovation project and need financing that is flexible and can be tailored to your needs, a fix-and-flip loan may be a better choice.

If you want an experienced and reliable loan partner to help you buy the perfect house, contact Hard Money Georgia. We specialize in providing loans against property value to those who might have a poor credit report or might not get approved by the bank for other reasons. Looking for fast and reliable funding options for your next real estate investment? Contact us today, and we’ll help you close the deal on your desired property efficiently.