House flipping is common amongst real-estate enthusiasts; it has bent the world down to its knees and is not dethroning anytime soon.
In case you want to jump on the fix-and-flip bandwagon, think about whether traditional loans are better or this would work for you. However, if you have decided to borrow money to renovate a property, ponder over these pointers before you make the final call.
There is one primary difference between traditional home mortgages and FnF loans; banking institutions issue the former, while private, direct investors fully fund fix-and-flip loans.
What’s a Fix-and-Flip Loan?
Let’s start with the basics and then move further on. Fix-and-flip loans are also known as hard money loans or rehab loans. They are given short-term to fulfill the purpose of financing real estate investments.
7 Differences Between Fix-and-Flip Loans and Traditional Home Loans
Let’s break it down.
- The Time of Achieving a loan
Time is money; this saying fits perfectly with fix-and-flip loans. The goal of purchasing a property to flip is to do so quickly for maximum profit in minimum time. Fix-and-flip loan lenders are quick to respond and are flexible. The approval and fund sanction happens as fast as 5 to 10 days.
On the other hand, a traditional bank loan takes 45 to 60 days to approve and move forward.
The longer timeline in the bank is due to extensive borrower application, strict rules, and thorough research on your financial background.
- The Timeline of the Loan
A traditional home mortgage loan is set off for around 15 or 30 years; however, with a fix-and-flip loan, you can get monthly interest-only payments for a period of 6 months to 2 years.
Since most lenders for fix-and-flip loans don’t have penalty fee criteria, you can pay off the remaining balance as soon you sell the item on the market.
- Collateral Item
Both fix-and-flip loans and traditional home loans require a collateral item in the form of the property being purchased. However, fix-and-flip loans may need additional collateral, such as personal assets or a personal guarantee from the borrower.
- Down Payment Terms
If we talk about fix and flip loans, you need to pay a hefty down payment which is around 20-30% of the total purchase price. On the other hand, traditional loans require a smaller amount, which can go as low as 3%.
- Condition of The Property Which Needs Investment
Yet another crucial difference between the two types of loans is related to the property’s condition in the purchase question. A standard mortgage loan provider has strict requirements concerning the condition of the property.
Whereas the condition of the property does not matter if there is enough after-repair value (ARV) to justify the loan amount for fix-and-flip loans. Now, it is quite obvious; since the purchase is made to fix it up, its condition is often poor.
- The Dreaded Credit Score
As you know, a traditional home loan depends majorly on the state of your credit; fix and flip do not work that way. The approval decision depends on the property value rather than your creditworthiness.
- Loan Costs
When you borrow from a conventional lending institution, your interest rate will be considerably lower than with a mortgage broker. The origination charge is typically no less than one or two points (1% to 2% of the loan amount).
A fix-and-flip loan will have a greater interest cost and an application fee between 2 and 4 (or more) points. In addition to the actual amount you’ll be borrowing, both types of loans come with a number of additional expenses that you should be aware of.
You can always get in touch with professionals from Reddoor Funding to provide you with accurate information about loan programs and funds for your flip-and-fix project. Connect with us by dialing 832-539-1099.