What are Fix and Flip Loans?

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If you're unfamiliar with the term, a fix-and-flip loan is a type of financing that can be used to purchase and renovate a property. The goal is to fix it up and then sell it for a profit. These loans are becoming increasingly popular as more people enter the flipping business.

In this article, we will discuss fix and flip loans, how they work, and who is eligible for them. We will also provide tips on qualifying for a fix and flip loan!

How do Fix and Flip Loans Work?

Fix and flip loans work by providing quick, short-term financing to purchase properties that require some renovation work. This type of loan is typically repaid over 12-24 months or less, making it a good option for investors looking to turn a profit on their investments quickly. However, the interest rates tend to be higher than conventional loans due to higher lender risk.

The loan is designed to match the cash flows of flipping real estate. This involves buying a property, funding repairs, and selling the improved home. As a result, fix and flip loans tend to offer more money upfront, have minimum monthly payments, and have a balloon repayment when selling. Sometimes, the monthly payment will be interest-only, which minimizes holding costs.

The down payment is typically decided as a percentage of the after-repair value (ARV). This is an appraiser's estimate of the home value after the successful completion of the construction plan. For example, suppose you want to finance flipping a home on a $150,000 home that is predicted to be $200,000 after repairs.

While the fix and flip lender may require a larger down payment, they provide more financing to enhance your flipping return. A conventional lender offering an 80% loan to value would require a $30,000 down payment and provide $120,000 of financing. However, a fix-and-flip lender with 75% ARV financing would require a $50,000 down payment with $150,000 financing.

Pros & Cons of Fix and Flip Loans

Advantages

• Quick funding: allows borrowers to take advantage of foreclosed homes quickly.
• Potential higher returns: lenders typically offer more financing than conventional lenders.
• Flexible payment structure: potential interest-only and balloon payments to minimize holding costs.

Disadvantages

• Higher interest rates: higher lender risk results in a higher interest rate.
• Short payback period: requirement to complete construction and sell within 12 to 18 months.
• Eligibility requirements: essential to have sufficient experience in real estate investing and flipping to qualify.

The Six Types of Fix and Flip Loans

• Hard Money Loans

  Hard money loans have the highest interest rates, ranging from 10% to 20%. Borrowers typically use them with low credit scores or who cannot be approved by other options. However, hard money loans have become popular with real estate flippers due to the fast turnaround and flexible eligibility requirements.

  The term lengths range from six months to three years. However, it can also be issued for up to 25 years. Lenders typically expect borrowers to pay off the loan quickly due to high interest rates. Overall, hard money loans are an excellent place to start for beginner investors.

• 401(k) Loans

  Another option is taking advantage of the 401(k) withdrawal for home purchase. This allows you to borrow money from your retirement savings for investment purposes. This can be a good option if you need quick financing and have the funds in your 401(k) account. However, this is a self-loan that must be paid back with interest. Additionally, you may have to pay a 10% penalty if done incorrectly.

  This option is best combined with another type of fix and flip loan. For example, the 401(k) withdrawal can be used as a down payment for a hard money loan. More creative borrowers may combine it with seller financing, and crowdfunding to squeeze out the down payment requirements. You can also use our 401k withdrawal calculator to determine how much you can withdraw.

• Home Equity Loans

  Another common fix and flip loan type is a home equity loan, which allows you to use the equity in your primary residence as collateral for investment purposes. Like 401(k) loans, this can be a good option if you need quick financing, but it's important to note that using your home as collateral will put your property at risk if you cannot repay the loan.

  To qualify for a home equity loan, you typically need good credit and at least 20% equity in your property. There are multiple different types of home equity loans available:

  • Second mortgage
  • Cash-out refinance
  • Home equity line of credit (HELOC)
• Personal Loans

  These loans are typically unsecured, meaning there is a high default risk for lenders. This is because they can’t seize any assets if you fail to make payments. As a result, personal loans have higher interest rates and can be more challenging to qualify for due to stricter eligibility requirements.

  You will typically need good credit, and a stable income to qualify for a personal loan. Some lenders may also have specific requirements regarding your employment status and financial experience. However, if you can qualify for a personal loan, it can be an excellent option to help finance your fix and flip investment projects.

• Owner Financing

  Owner financing is another option for financing fix and flip projects. This involves working with the current homeowner to finance the purchase of a property that needs some renovation work. This approach is commonly used when buyers have more leverage and combine it with another form of financing. For example, you can now purchase a property for $100,000 and pay the remaining amount to the lender after flipping the property.

• Crowdfunding

  On the newer and more creative side of financing is crowdfunding. This involves receiving investment from friends and the general public. Trusted platforms like Kickstarter and Indiegogo reduce the risk for your investors.

  This can be a great option to help you raise the funds you need quickly without putting up any collateral or taking out a loan. However, it's important to note that crowdfunding is typically not used as the sole funding source for fixing and flipping projects - instead, it is often paired with other financing options. For example, you may use crowdfunding to receive the down payment for a hard money loan.

Fix and Flip Loan Eligibility

Most lenders will require that borrowers have at least some prior experience in real estate investment before they can qualify for a fix and flip loan. While there are no specific eligibility requirements for most fix and flip loans, in general, you will need to meet the following criteria to qualify:

• A good credit score (usually above 650).
• Some lenders may require a construction plan.
• Experience or training in real estate investment or renovation work.
• A high level of financial stability, with assets that can be used as collateral if necessary.

It's also important to note that lenders may have additional eligibility requirements regarding property type, location, or the scope of renovations being done. For example, some lenders may only work with registered corporations, LLCs, or partnerships.

Qualifying Tips

• Do your research and find the right lender for you. Many different lenders offer fix and flip loans, so shopping around and comparing rates and terms is essential to find one that works best for your needs.
• Work on building your credit score and improving your financial stability. A good credit score and a solid financial profile will typically be critical factors in your eligibility for a fix-and-flip loan.
• Look into any additional requirements or restrictions that may apply to the property type, location, or scope of renovations you are planning. This can help you better prepare and meet all the criteria for financing.
• Consider getting training or experience in real estate investment or renovation work. Though it is only sometimes necessary, some lenders may prefer to work with borrowers with prior experience in these areas. If you are new to investing and flipping properties, try enrolling in a course or program to help you develop the skills you need to succeed.

Alternatives to Fix and Flip Loans

A fix-and-flip loan is designed to buy an existing property and flip it within one to two years. However, they aren't designed to construct a home or to move into it after renovation. If you want financing to build a home or purchase a new property, consider other options, such as construction or mortgage loans. This section will dive into the fix and flip loan alternatives.

FHA 203(k) Loans

The FHA 203(k) loan is a specialized type of loan that allows you to purchase a home that needs repairs. It is commonly used for buying a home and renovating it to live in. In addition to the money for buying the house, this type of loan also provides financing for renovations up to $35,000.

To qualify for an FHA 203(k) loan, you will typically need a 3.5% down payment and a credit score of at least 580. However, some lenders may have additional eligibility requirements - it's essential to research and find the right lender for your needs.

Conventional Mortgage

One potential alternative to fix and flip loans is a conventional mortgage from a bank or other lending institution. With this financing, you can usually get longer loan terms, lower interest rates, and more flexibility in choosing your property.

However, qualifying for a conventional mortgage may be more challenging than a fix-and-flip loan, as you need a good credit history, sufficient income, and suitable collateral. Additionally, these loans don’t offer additional financing for renovation. You will need to pay those costs out of pocket, or with a different loan.

Construction-Only Loan

Consider a construction loan if you want a solution to building and selling a property. This type of financing allows you to borrow money for the construction or renovation of a property, and it typically offers favorable interest rates and terms compared to fix and flip loans.

However, qualifying for this type of loan can be more complicated than other options, as lenders want proof that you have sufficient experience in real estate investing and flipping.

Construction to Permanent Loan

Another possible alternative to fix and flip loans is a construction to permanent loan. This type of financing allows you to borrow money for a property's initial construction or renovation and then convert it into a long-term mortgage once the project is completed. As such, this type of loan is best for those who want to move into their property after building it. Like fix and flip loans, this option typically offers higher interest rates compared to other types of mortgage loans.

The Bottom Line

Fix and flip loans are an excellent option for experienced investors looking to purchase properties that need work. The quick turnaround time on these types of loans makes them ideal for those who want to make a profit quickly.

However, because of the higher risk involved for lenders, the interest rates tend to be higher than with conventional loans. Before applying for a fix and flip loan, make sure you have some real estate investment experience and meet the general eligibility requirements set by most lenders.