Getting Funding for Your Fix-and-Flip Property
Want to get in on the fix-and-flip property craze but having trouble getting financing? It’s easy to see why. After all, investors need money to be able to buy and renovate the home before they can sell it. But banks aren’t in the business of loaning money to help flippers buy homes in need of repair. The process can be long and cumbersome – and if you live in a super-competitive real estate market, you could be left behind before you even make an offer!
Fix and Flip Loans – the Best Types of Financing
Hard Money Loan / Private Money Loan – This type of financing is best for flippers who need money fast and don’t have time (or the credit) to wait for banks to approve or deny their application. Both experienced and beginning flippers can take advantage of hard money loans to get funding quickly by using existing collateral.
Cash-Out Refinance – This type of loan is ideal for those fix-and-flip investors that have enough equity in an existing property or home.
Home Equity Line of Credit – A HELOC is best for flippers that have an owner-occupied home. If you don’t have a specific project in mind, a HELOC can give you access to money using the equity you’ve built up in your home.
Permanent Bank Loans and Online Mortgages – If you want to buy a property and hold onto it, this would be a better type of loan. Not a good choice for fix-and-flip investors.
As to which type of funding is right for you, it really depends on the type of property, what condition it’s in, how experienced you are with real estate investing and your own personal situation.
Have a Better Understanding of Fix & Flip Hard Money Loans
Our top choice for most investors is a fix and flip hard money loan. This is a loan that’s secured by existing real estate property and used by flippers to purchase and renovate another property. It’s also known as a “private money loan” since it bypasses the traditional lending process and instead connects the flipper to real estate investors who have cash on hand to loan.
Although hard money loans can be approved faster than traditional loans, you should know that they are more expensive than permanent mortgages. There’s a lower qualification threshold to meet, however, and you can receive approval and funding in as little as 15 days.
Private money loans are great for first-time or beginning fix-and-flippers, as investors don’t care about your experience in the real estate market or your credit report as much as they care about the collateral that you’re securing the loan against.
Here is What You Need to Get Qualified For a Fix & Flip Hard Money Loan
When compared to traditional loan approval, you’ll find the fix and flip loan approval process refreshingly fast and simple. Generally, fix & flip hard money lendersrequire the following:
- A credit score of 550 or greater (640+ preferred)
- A debt to income ratio of approximately 35-45%
- 2-3 previous home rehabilitation projects if you’re going the DIY route of fixing and flipping
- The information for a licensed contractor to help if you’re not that experienced at fixing and flipping yet
The higher your credit score, the more likely you are to get approved at a lower interest rate and higher borrowing limits.
Are There Any Financing Limits to a Fix & Flip Loan?
Just like traditional loans, hard money loans also have specific terms, interest rates and fees. While these numbers vary from lender to lender, they are typically as follows:
- 1-2 year term
- 7 days until funding arrives
- Interest rates ranging from 7-12%
- Lender fees of 1.5-10% (These are usually taken directly out of the loan)
- Closing costs of 2-5% (Usually paid out of pocket)
- Repayment time frame – monthly. You’ll make interest only payments at first and repay the principal at the end of the term. There is generally no penalty for pre-payment.
Hard money lenders gauge the limits to the loan amounts they lend equal to a percentage of a property’s “LTV” or loan-to-value ratio or its “ARV” or after-repair value ratio. Hard money loans that use the LTV valuation can’t finance home renovations, but loans that use ARV can.
This number is based on a percentage of the property’s current fair market value either currently (LTV) or after the rehab (ARV).
Is a Fix and Flip Loan Right for You?
If you’re an experienced house flipper with previous projects under your belt, or you have the help of a licensed contractor on your side, a fix and flip hard money loan may be right for you. Fix and flippers who need to compete with all-cash buyers also have several advantages when using a hard money loan, especially in competitive markets.
To learn more, be sure to contact us using contact form or call (818) 584-2424 to find out if a fix & flip loan is right for your specific needs.
Related Information: Commercial Loans | Construction Loans