Hard Money vs. Traditional Loans: Which Is Better for Fix-and-Flip Deals?

Fix-and-flip investing is a rapidly growing real estate strategy, especially in today’s low inventory market environment. These properties offer impressive returns to investors while also delivering much needed desirable homes to underserved markets. When it comes to financing a client’s fix-and-flip project, you may be wondering which type of financing is most suitable for it. Aside from traditional mortgage loans, hard money is becoming an increasingly viable option, with shorter loan terms that perfectly fit the timeline of a home flip.

So, which is the better option for a fix-and-flip deal? Read on as we compare these loan solutions and learn when it is best to go with either option.

What Are Hard Money Loans?

So, what are hard money loans, exactly? These are short-term, asset-based loans which focus primarily on the value of the property rather than a borrower’s credit. They are backed by the value of the property being financed, used as collateral to secure the loan. Rather than banks or credit unions, they are provided by private and hard money lenders who often specialize in real estate financing.

As for the benefits, hard money loans provide a much faster approval process than conventional mortgages, with loans approved in days. They also provide more flexibility, with less stringent requirements for both the borrower and the property being financed.

What Are Traditional Loans?

Traditionally, mortgage loans are provided by banks and credit unions and come in 15 or 30-year varieties. They use the borrower’s credit score to qualify applicants and to determine loan terms. Traditional mortgages have a more in-depth application process, which can take weeks or months for loan approval. This does mean that traditional loans come with exceptionally low interest rates, but they also have some significant restrictions. Only a certain number of FHA loans can be taken out at once, and conventional financing providers may have worries about lending on properties in need of major renovation.

Key Differences Between Hard Money and Traditional Loans

When Should Brokers Recommend Hard Money Over Traditional Loans?

As you may have noticed, there are certain scenarios where a hard money loan is more suitable than a traditional mortgage. For instance, hard money loans can be incredibly useful in securing time-sensitive deals, due to their streamlined approval process. They are also more suited to short-term deals than traditional loans.

If an investor has limited credit history or non-W-2 income, it may be harder to qualify for a traditional mortgage, but they can still be approved for a hard money loan since lenders will be more focused on the value of the property. Finally, if a property needs significant rehab, a hard money loan is the better option as they can provide additional funds for renovations on top of covering acquisition costs.

When Should Brokers Recommend Traditional Loans Over Hard Money?

Conversely, there are cases where a traditional loan may be a more suitable financing solution. Bank mortgages typically offer lower interest rates than private loans, so for investors who need stable, long-term financing, they can be a viable option. It does require that the borrower has excellent credit & financials though, so that they can secure a lower interest rate. Traditional loan options are good for investors making long-term investments; they aren’t suitable to fix-and-flips unless they decide to rent the property out instead of selling. If they aren’t in a rush to acquire funding, however, they can be an effective way for an investor to save money on financing.

Helping Your Clients Choose the Right Financing Option

So, how can brokers ensure they are matching a client with the best financing solution for their scenario? First, take the time to understand their investment strategy. Ask about their exit strategy, project timelines, and if there is a sense of urgency in securing financing. You should also ask questions about your client’s financial situation; do they have strong credit? Are they self-employed? Can they afford a large down payment? The answers to these questions will help you suggest options that best suit their needs and deal scenario.

It will also help if you have existing relationships with real estate lenders. This allows you to offer multiple financing options to your clients and even compare rates and terms for similar loans. Building relationships gives you access to benefits like reduced fees and a streamlined approval process, which can help you close more business. Plus, partnering with lenders who specialize in certain types of financing, such as fix-and-flip loans, allows you to provide tailored solutions to your clients.

RCN Capital

The best way to save on a real estate investment is to obtain financing from a lender that can provide you with the best leverages and rates. RCN Capital lends to real estate professionals, commercial contractors, developers & small business owners across the nation. We provide short-term fix & flip financing, long-term rental financing, and new construction financing for real estate professionals. If you are looking to finance a fix-and-flip project, RCN Capital has competitive loan options and an award-winning broker referral program available to partners.