Hard Money Loans Versus Fix & Flip Loans and Why the Industry is Confusing the Two
Hard Money and Fix & Flip Loans are among the most popular programs that investors utilize
for their real estate investments. Although they are two different programs, many inside and
outside the industry believe them to be the same loan…but this is the furthest thing from the
Hard Money Loans
A true Hard Money Loan is an asset-based loan, which means the financing is based on the
Loan to Value (LTV) of the Asset. Unlike the Fix and Flip loan, it doesn’t go through full
underwriting and there’s no minimum FICO requirement for the borrower, as it doesn’t have
many guidelines and criteria.
This type of loan doesn’t have as many restrictions as one might think considering that it’s just
money, so no more having to worry about bankruptcies, foreclosures, collections, etc.
Due to the lack of guidelines and underwriting, a true Hard Money Loan is generally capped at
65% LTV or less. For example, let’s say you have a home worth $1M, if you want $500K against
it (50% LTV), you’re able to receive the money within 1-2 weeks (from day of application),
commonly as a first lean position – because it’s just money. It’s normally in the form of a Bridge
Loan, which is short term financing in a period of 12-24 months.
One of the reasons why Hard Money Loans are for investment properties ONLY, is due to the
high cost regulations and predatory lending – you can’t put such high interest rates and cost on
an owner occupied property.
In certain states, there are non-judicial foreclosure laws, which allow a Hard Money lender to
get their money back quickly if the borrow defaults on the mortgage.
These foreclosure laws make the lender more comfortable doing high-risk loans, usually the
money is not sold on the secondary market – the lender holds the note, they don’t sell the
Fix & Flip Loans
Fix & Flip Loans are also asset-based loans, however they utilize more underwriting guidelines
and criteria. While Hard Money Loans focus solely on the asset, Fix & Flip loans look at both the
asset and the borrower.
The reason why people confuse Hard Money Loans with Fix & Flip Loans, are because both the
loan and the laws are very similar – they are both private money to an investment property.
Virtually all fix & flip and hard money loans are funded by hedge funds, the money comes from
the same place, but the underwriting is different.
Contrary to Hard Money Loans, Fix & Flip Loans are usually sold on the secondary market and
goes through a full underwriting with tighter guidelines. For instance, depending on the lender,
Fix & Flip loans have a minimum FICO requirement. Additionally, the borrower can’t have late
payments, foreclosure, judgments, or bankruptcy on their credit for 24-36 months.
Furthermore, a Fix & Flip loan is a rehab loan, a loan that you utilize to acquire a property and
then receive the funds to rehab that property in short term financing (12-18 months).
Depending on whom you are working with, it’s important to bring something dynamic to the
table, to help you close your loans quickly, efficiently, and professionally.
However, make sure that when you move forward with a mortgage lender that you know all
the details of your loan, why they are utilizing that program, and whether or not that loan
program is being properly presented to suit your needs.
Written by New Jersey based Mortgage Expert, Michael Mikhail, CEO of Stratton Equities.