How To Get A Loan To Flip A House

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A quick summary

Starting your journey into the world of real estate? If fix and flips are your real estate vehicle of choice, you may be wondering how to get a loan to flip a house. Well, it’s easier than you might think, and you’ll have a few options to choose between, ranging from hard money loans to crowdfunding.

Key Topics

House flipping involves finding a property that needs work, fixing it up and then selling it for a higher price to make a profit. It’s one of the most lucrative strategies in real estate investing and one of the most popular. If you’re just beginning your real estate career or thinking about branching out into fix and flip projects, one of the first things you’ll need to know is how to get a loan to flip a house.

Getting a loan for a house flip is easier than you may think as there are a variety of lenders and loan types readily available. The trick is choosing between them, so it’s important to know the details about each loan type before you decide. We’ve put together an overview of each type of fix and flip loan for real estate investors who are just starting out.

Can you use a conventional loan to flip a house?

Conventional loans, like a 15-30 year mortgage, can’t be used for a fix and flip project due to the short-term nature of these projects. Traditional lenders usually don’t provide loans for fix and flip projects because traditional mortgage loans are generally spaced over a longer period of time, and to buy an investment property that you plan on renovating and then selling soon afterwards, you won’t want to be tied into a long-term loan option.  

However, there are some alternative mortgage loan types that you could use for a house flip, such as a construction loan, a renovation loan or a cash-out refinance.

  1. Construction loan: Typically, this type of loan is used by builders who would be building a house from the ground up, but it can also be used for fix and flip projects. The advantage to this type of loan is that once the house is sold, you can pay off the loan and you’re all set.
  2. Cash-out refinance: If you have another home or investment property that you’ve built up equity in, you can use this equity to purchase your property to flip. The benefit to this option is that it can be more cost effective because you’re tapping into existing equity.
  3. Renovation loan: This can be used for renovations on an existing home, which would suit a fix and flip project very well. These deals are based on the after-repair value (ARV) of the property, so if you’ve got a got deal in mind, this could be the best option for you.

What kind of loan do you need to flip a house?

types of fix and flip loans

1. Hard Money Loans (Fix & Flip Loan)

Fix and flip loans from hard money lenders are a quick way to get access to funds, without all the red tape that traditional loans have. Hard money loans are provided by private investors or individuals and often use the property as collateral. Loan terms for hard money loans are usually flexible and allow for a shorter loan period which is ideal for house flipping.       

There are a variety of companies that specialize in hard money loans for real estate investors, such as New Silver. Interest rates are higher on these loans, however getting approval for a hard money loan can be done in a matter of minutes. The down payment required on a hard money loan is usually about 10% and the loan approval is based on the return on investment and ARV value that the property is estimated to get.

Fix and flip hard money loans can be a great option for investors who have found a good deal and need to take advantage of the opportunity quickly. Lenders like New Silver offer pre-approval in minutes, with a proof of funds letter as soon as the loan is approved. Loans with New Silver can be processed in as little as 5 days, which means that investors won’t miss out on a deal even if there’s stiff competition.

Hard money loans for fix and flip projects are usually about 1 year, which is the ideal length for house flipping projects, and these lenders will finance a large portion of the funds that you’ll most likely need, and sometimes even 100% of the repair costs. Using a hard money loan to fund your house flip can be a quick and painless experience compared to other loans because lenders like New Silver do the entire loan process online.

2. Private Lenders

Private lenders are not necessarily associated with any traditional financial institutions and are individuals or companies who provide loans using their capital. These loans are based on their own terms, which usually involve using a property as collateral or basing the loan on the potential success of the deal. The benefit to private lenders is that they have more flexible loan terms when it comes to repayment amounts and loan periods.

Private lenders often have a faster process than traditional financing methods, and easier ways to qualify for loans, however these vary depending on the lender. There are many private lending companies that real estate investors can seek out for projects like a fix and flip. Private lenders make their money from the interest paid on the loan, so bear in mind that interest rates may be higher on these loans.

3. Crowdfunding

One of the latest ways to get financing for real estate projects is through crowdfunding for real estate. Individual investors on crowdfunding websites help raise the funds that an investor or developer needs for their real estate project. Basically, a group of investors online come together to invest in the project by pooling their funds, with the idea being that various small investments will add up to cover the amount that is needed.

Through crowdfunding real estate platforms such as CrowdStreet, investors can get access to exclusive deals that they may not have been able to before. The funds are usually held in a REIT (Real Estate Investment Trust) or something similar, which acts as a holding company where the funds can accumulate. For fix and flip projects crowdfunding can be a useful way to get funds if you can show others that it’s a good deal.

4. Home equity loans & HELOC’s

For house flippers who already own a property with a substantial amount of equity, this is a good option to finance their flip. A home equity loan or home equity line of credit (HELOC) allows you to use the equity you already have in a property to purchase another property. The advantage to these loans is that they’re often easier to qualify for because you’re tapping into existing equity.

HELOC’s usually have low interest rates and allow you to access the funds as you need them because it’s not a lump sum loan but instead a line of credit. You’ll need at least 20% equity in your home to qualify for a HELOC or home equity loan and you’ll typically be able to borrow up to 85% of the value of your primary residence.

The draw period on a HELOC can last up to 10 years, which means that for the first 10 years you’d only need to pay the interest on the loan, and you can continue to draw out more funds as you need them. However, thereafter you’ll enter the repayment period where you’re required to pay back whatever you still owe on the principal amount.

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How do loans for flipping houses work?

House flipping loans usually run for a period of 6 to 18 months, with 12-month fix and flip loans being the most popular. Usually fix and flip loans have a fixed interest rate for the entire period of the loan. They are often structured as interest-only loans, where a balloon payment is required.

This means that for a certain period of the loan, only the interest needs to be paid (this period is often the full 12 months). Thereafter a balloon payment needs to be made to cover the balance of what is owed in total, at the end. Which of course plays right into the needs of a house flip because the principal amount can be covered by the sale of the house once it has been fixed up.

House flipping loans are designed to cover both the purchase of the property and the renovations and repairs. The maximum amount that you can borrow will depend on the lender, and this is often calculated based on the estimated return on investment, ARV value and other factors.

What's the difference between a hard money loan and a house flipping loan?

A house flipping loan is a type of hard money loan often called a fix and flip loan. It is geared specifically towards fix and flip projects to enable real estate investors to purchase a property, renovate it and then sell it again. The property itself is used as collateral for the loan,

There are various other types of hard money loans which include:

  • Ground up loans: These loans provide funding for builders to build homes from the ground up.
  • Rental loans: These loans are for real estate investors who are purchasing a property to rent out.
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Fix & flip loan for beginners - Key requirements to be aware of

While the emphasis is on the property itself and not on the borrower so much, there are still some basic requirements for hard money loans and other fix and flip loans that a borrower will need to meet.

  • Credit score: On average, borrowers need a credit score of 600. Compare that to the average 680 – 700 credit score traditional lenders require and it’s easy to see why other loans are a great alternative.
  • Loan To Value ratio: Lenders will want a real estate investor to be investing some money into the project themselves as well, to show their level of commitment to it. Usually this is around 15% investment of a fix and flip’s purchase price or 25% of the ARV.
  • Previous experience: Some lenders will require previous house flipping experience, simply because they can then see that you’ve successfully managed a flipping project and are therefore more likely to make a success of the next one.
  • Proof of income: Lenders still need to make sure that you can afford the repayments so they may require proof of income or another type of verification that you aren’t likely to default on the monthly loan repayments.

Final Thoughts

Fix and flip loans are a great alternative for real estate investors, and choosing the right loan depends on each investor’s goals and financial position. Whether it’s hard money loans, home equity loans or any other kind of loan however, it’s important to get your ducks in row financially and choose a good deal, before you apply. That way you can show potential lenders that not only have you found a great deal, but you can also afford the repayments.