A Fix and Flip Loan, also known as a hard money or bridge loan, represents a specialized form of asset-based financing where a borrower secures funds against the value of a real estate parcel.
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Fix and Flip loans typically come with notably higher interest rates compared to traditional commercial or residential property loans. They are rarely extended by commercial banks or other deposit institutions. It’s worth noting that hard money loans share similarities with bridge loans, including lending criteria and associated borrower costs.
The key distinction lies in the fact that a bridge loan often applies to commercial or investment properties that may be in a state of transition, not yet meeting the requirements for traditional financing. In contrast, hard money loans often encompass not only asset-based lending with elevated interest rates but may also involve distressed financial situations, such as mortgage arrears or ongoing bankruptcy and foreclosure proceedings.
Many Fix and Flip mortgages originate from private investors, usually within their local communities. The borrower’s credit score typically holds minimal significance because the loan is secured by the collateral property’s value. Generally, the maximum loan-to-value ratio (LTV) ranges from 65% to 70%. To illustrate, if the property holds a value of $100,000, the lender would provide an advance of $65,000 to $70,000. This lower LTV serves as an added safeguard for the lender in case the borrower defaults, necessitating foreclosure on the property.
