Although these two funding methods are very similar and can seem like they would be used in the same situation there are key differences that set them apart. Knowing the definition of each term can help you understand which one is best for you to use in specific situations, providing you with the best funding method for your real estate needs. If you need money to renovate a property, or you need money fast, choosing either one of these funding methods can help get you on the right track – but choosing the specific financial method is the difference between success and failure.
Fix and flip loans vs. hard money loans – what you need to know
Fix and flip loans and hard money loans are two very popular funding methods for real estate ventures – you often see new workers and agents in the real estate industry using these types of funding methods instead of bank loans due to other easy approval processes, lack of wait time, and easy ability to get the loan when compared to banks (you don’t need a high credit score, extra collateral, etc.). And there are more about fix and flip loans for you to learn more. However, what sets these two loans apart?
Even though they are both used for flipping homes and renovating houses, many people know three are key differences that must be known to be able to choose the best one for your real estate project.
Hard money loans
The first type of loan that we will be using is hard money loans. Hard money loans are loans from private investors that can be tied to individuals in the real estate industry who are looking to flip houses. In this case, the house and the property are used as collateral and as the asset in the deal, ensuring both parties are satisfied with the agreement.
- Unlike fix and flip loans, hard money loans do not have any minimum FICO requirements
- A hard money loan does not have very many restrictions are other loans do – it can be viewed simply as a private investor giving you money for a project
- Hard Money loans do not necessarily have high-interest rates – this is a misconception in the industry. In fact, most people will have interest rate terms that are similar to bank loans.
- Most hard money loans are typically maxed out at around 60-65% based on the loan value.
- Hard money loans are valuable for property investment due to the cost regulations.
Fix and flip loans
Fix and flip loans have more underwriting, guidelines, and rules that must be followed when they are being used in the industry. Although hard money loans are mainly focusing on the property (the asset), the fix and flip loans are taking both parties into account – the property and the person borrowing the money.
- Fix and flip loans go through an entire underwriting process, which is the opposite of hard money loans.
- Fix and flip loans are used to acquire a property and for short-term renovations.
Although both are used in the real estate industry, fixed and flip loans and hard money loans have significant differences that can tell them apart. Make sure you know the rules and regulations of using each one before you apply for a loan for your new housing venture!