House flipping is a lucrative business that entails buying inexpensive homes, repairing them, and re-selling them for profit. Between purchasing the property, renovations, and selling at an increased rate, house flipping requires a lot of upfront money. Understanding the risks involved with house flipping is essential to a thriving business. If you are interested in starting, read more about fix and flip loans and how to use them for your investment properties.
What Is a Fix and Flip Loan?
Fix, and flip loans are short-term business loans that lenders grant house flippers or borrowers to invest in commercial or rental property. The benefits of these loans are the fast closeout rates and the amount you may receive in a deal. Fix and flip loans range from $100,000 into the millions. The amount of money granted depends on the seller’s loan needs and the property value return on the deal. Lenders won’t provide the loan if they believe they are entering into a poor investment deal. Loan contracts vary between 12 and 18 months. You can learn more about fix and flip loans from these professionals.
Pros Of A Fix and Flip Loan
- Rapid Funds: Fix and flip loans, also known as hard money loans, have quick closeout rates. Traditional banks take months to close a loan deal. Borrowers may receive fix and flip funds within 5-14 days compared to 30-48 days via conventional banking.
- Reduced Risk: Lenders base fix and flip loans on the property’s value. Your credit and home equity are not involved in a fix and flip loan. If the investment is profitable, you won’t have to worry about losing your assets.
- Flexibility: Hard money lending terms are more flexible than traditional banking processes. Borrowers that may not qualify for bank loans can still work with hard money lenders. Lender deals are not bound to the strict loan processes of conventional banks.
Fix and Flip Loan Disadvantages
- Interest Rates: fix and flip loans have high-interest rates, between 9-12%
- Short-term Contracts: Traditional banking institutions offer more time to pay off loans or mortgages. Fix and flip loans sit between 12-18 month payouts after the deal closes.
- Upfront Investment: Unless you’re an experienced flipper, lenders don’t usually pay out 100% of costs. A deal may require a certain percentage of your funds contributed. Speak to your local lender about the best course of action for your investments.
Types of Fix and Flip Loans
Different loans offer finance options with their qualifying policies and terms. Some loans are more lenient, while others have stricter requirements. Below are the types of fix and flip loans most beneficial to you.
- Hard Money Loans: House flippers use hard money loans to invest, renovate, and profit from the property sale, typically within a year. Lenders do not focus on the borrower’s credit or debt-to-income ratio but on the deal’s value. Although the interest and point fees are high, hard money lending is viable for fast flipping. Closeouts range from 10-15 days or less.
- Bridge loans: A loan in-between two real estate transactions. Bridge loans are helpful when a house flipper has one property on the market while purchasing a new one. Bridge loans cut out the waiting game of selling a property first, paying out the lender, and waiting for funds to start a new deal.
- Cash-Out Refinance: cash-out refinance loans are refinancing a property to pay off an existing loan and using the profit as equity to invest in a new property. These fix and flip loans help borrowers use their funds to pay off the loan or mortgage on one property to finance another. These loans are contingent upon credit history, real estate experience, and assets. ‘
- Crowdfunding: Like hard money, crowding is an organization of investors who collectively finance loans. The investors supply a percentage of the loan while earning interest.
Although there are many types of fix and flip loans to choose from, the examples above are standard and profitable loans for borrowers with the right qualifications.
How Do I Qualify for a Fix and Flip Loan?
Qualifications vary depending on the type of loan you are eligible to receive. Requirements for the most common fix and flip loans include:
- Hard Money Loans: Various credit levels accepted, house flipping experience, or profitable house flipping proposal.
- Bridge loans: Qualifications include 20% equity and a properly strategized sale or exit strategy.
- Cash-out Refinance: 660 credit score, 45% debt to income ratio, 40 percent equity.
- Crowdfunding: Qualified project proposal for first-time buyers or flippers.
Get The Most Out of Your Fix and Flip Loan
If you want to start your property flipping business with a fix and flip loan, the first step is to understand your market and budget your costs. Contact a reputable lender to learn more about how to qualify for your fix and flip loan. Even if you’re a first-time home flipper, programs are suited for you as you establish your business. The lending process can offer fast and straightforward ways to obtain money while investing in multiple properties.