People in the fix-and-flip business often find themselves in a fix when it comes to finding money for house flipping.
As portrayed by most TV reality shows, house flippers buy cheap property, remodel it, and then sell it for top dollar.
While it’s indeed true, these shows tend to not show what happens between the purchase of a property and its sale.
Here’s the truth: you’re likely to have the possession of the property for months and sometimes even years before you’re able to sell it for a good return.
And during this time, the costs of insurance, repair, taxes, utilities, and more all fall on your shoulders.
Considering this, it’s natural to get confused when you don’t have a pile of cash saved up for a house flipping project. The answer, however, is quite simple. A fix-and-flip loan might just be what you need to get started.
What Is a Fix-and-Flip Loan?
When you’re finding money for house flipping, a lender should typically be your go-to person. Several lenders out there may be willing to provide money for the purchase and renovation of a property so that you may sell it for a profit.
While fix-and-flip loans come with varying terms, they are usually short-term. Selling the house before the due date of full balance and paying the loan off using the proceeds is the goal here.
Things Lenders Generally Look for
Before you apply for a fix-and-flip loan, you should keep a few things in mind to ensure the approval of your request. Essentially, the first thing that most lenders look for is your financial stake in the property.
Secondly, you should have everything sorted out, especially a detailed estimate of renovation costs. Without this, a lender may not take you or your project seriously. Lastly, lenders will be interested in knowing your financial track record.
Previous house flipping experience is going to help you but if you’re a beginner, you’ll have to prove your credibility with a decent credit history along with a steady flow of income. Sometimes, lenders require a personal guarantee, which you may give by offering a personal asset to serve as collateral against the loan.
That being said, the lenders are typically only willing to finance around 65% or 70% of the After Repair Value (ARV) of the property or 85% of the purchase cost. You’ll have to pitch in the rest of the property’s value on your own. When you’re finding money for house flipping, it is also possible for you to come across a lender who may be willing to offer 100% financing for the project but such a loan is likely to come with an exceptionally high interest rate.
5 Kinds of Fix-and-flip Loans
There are 5 types of loans that you may use to fund your house flipping project. Each loan comes with its own specific terms, qualification requirements, and a set of pros and cons.
Let’s discuss each option in detail and find out which one will be the best bet for you.
Hard Money Loans
Also known as ‘rehab loans’, hard money loans are a common choice of real estate agents to fund their house flipping project. These loans differ from conventional bank loans such that private lenders fund them. You may get yourself a hard money loan from a private investor, a group of investors, or a licensed mortgage broker who offers a personal capital.
The terms of these loans are usually much shorter than that of traditional loans. Generally, they offer a six-month to a one-year term but they may go up to five years. Moreover, they come with relatively higher interest rates, typically ranging from 12% to 21%. You may also be charged 3 to 6 points upfront, where one point denotes 1% of the loan. In addition to this, the requirements regarding down payment for hard money loans are also quite different. You may end up receiving about 60 to 75 percent of the property value that you want to buy.
On the brighter side, hard moneylenders usually don’t focus on your credit history. People with a credit score as low as 550 can easily qualify for these loans. Furthermore, there is no extensive paperwork involved in acquiring a hard money loan. The application process is short and fast, which means you can get your hands on the money within a few days.
Another thing to keep in mind is that you present the property that you intend to flip as collateral when getting a hard money loan. Therefore, this option is perfect for you if you have some experience of flipping properties, at least two to three houses.
Home Equity Loan or Line of Credit
When finding money for house flipping, you should consider getting a home equity loan or home equity line of credit if you have equity in your residential property. Both these options allow you to use a certain percentage of your home equity as collateral. The only difference is that home equity loan, like your first mortgage, offers the money upfront and requires to pay monthly installments over the course of the loan term. On the other hand, a home equity line of credit allows you to use the loan amount in small chunks over the course of the loan life.
If you’re finding money for house flipping, a home equity loan may be a better option to fund your project considering the upfront access to the required capital. On top of that, home equity loans offer a fixed interest rate that is relatively lower than what hard money loans or credit card loans offer. Typically, mortgage lenders may allow you to borrow your home equity up to 80% on a second mortgage.
With a significant increase in the value of your current residential property, you can benefit from a funding option called cash-out refinance. The idea is to refinance your mortgage for an amount higher than what you currently owe and tap on the equity in your home, taking away the difference in cash.
As evident by the name, this funding option involves cashing out a certain percentage of your home equity to pay for your house flipping project. This implies that your new loan will be the due payment on your mortgage plus the amount of capital you want to cash out.
As far as the qualifying requirements for cash-out refinance option are concerned, you’ll probably require a minimum of 640 credit score. In addition to this, your debt-to-income ratio should be no more than 45% while your equity in the property is at least 30% to 40%.
On the downside, however, cash-out refinance loans require to pay closing costs, which may take 3% to 6% of the total loan amount. Furthermore, if you’re thinking of refinancing to a higher mortgage rate, you should be prepared to pay a fat interest rate on your loan in the long run.
Investment Line of Credit
This is yet another popular option for you to consider when you’re finding money for house flipping. An investment line of credit is almost completely similar to a home equity line of credit except that it is exclusively intended for purchasing investment properties. These short-term loans usually offer a term of 18-24 months. You’re given the liberty to borrow money whenever needed until you reach a pre-determined loan limit.
If you have some experience of flipping houses, this option may be ideal for you because your approval will depend on your track record of flipping properties and the financial capital involved. Moreover, an investment line of credit may be received within three weeks with an amount ranging from $1 million to $50 million. The interest rates on these loans are usually from 5% to 8%.
Another funding source for house flippers is crowdfunding. This option involves raising the required amount of funds through a large number of people using the internet. There are several crowdfunding sites available for you to choose from. Different sites offer different loan terms, interest rates, and qualification requirements.
If you’re finding money for house flipping, you should consider researching the lenders carefully before you apply for a loan. This will help you find an option that is best suited for your needs and wants.
Learn more about finding house flipping investment groups >
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Your lender may ask for a personal guarantee before allowing you to borrow money. Learn everything about it here.