Regardless of the type of investor you are and your loan scenario, there is an array of loan programs designed to meet all your mortgage needs. Hard money and fix and flip loans are among the most popular programs that real estate investors utilize. Although they are two different programs, many in and out of the industry believe them to be the same loan. This misconception is the furthest thing from the truth.
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 does not go through full underwriting and there is 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 percent LTV or less. For example, let’s say you have a home worth $1M, if you want $500,000 against it (50 percent LTV), you’re able to receive the money within one or two weeks (from day of application), commonly as a first lean position because it’s just money. It is 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 cannot 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 borrower 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 do not sell the paper.
Fix and Flip Loans
Fix and 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 and flip loans look at both the asset and the borrower.
The reason why people confuse hard money loans with fix and flip loans is because both the loan and the laws are very similar. They are both private money to an investment property.
Virtually all fix and 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 and flip loans are usually sold on the secondary market and go through a full underwriting with tighter guidelines. For instance, depending on the lender, fix and 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 and 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 is 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 that loan program is being properly presented to suit your needs.
The biggest misconception borrowers have, is that many believe that you need a hard money loan at high interest rates even though you are a high credit score qualified borrower. The fact is you can receive interest rates and terms very close to conventional financing while still being a no-income verification loan. Hard money is not a blanketed statement for all private money loans.
It is important the lending and real estate investing industries avoid blanketing terms that can cause confusion and a mislabeling of mortgage programs.
Michael Mikhail is the Founder and CEO of Stratton Equities, the nation’s leading direct hard money and NON-QM lender to real estate investors, with the largest variety of mortgage programs. For more information about Stratton Equities or to join our team, please visit www.strattonequities.com , call 1-800-962-6613, or email info@strattonequities.com.
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