Fix and Flip Loans: A Complete Guide

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According to research by ATTOM Data Solutions, gross returns for flipping residences reached their best level in 20 years just last year. If you want to get into a potentially lucrative business, you’ll need to learn everything about fix and flip loans.

A detailed guide to the best fix and flip loans, as well as how to apply for one, can be found here.

What is a fix-and-flip loan?

Flipping houses can help you make a lot of money over time. However, the initial costs might be high – purchasing a home and paying for repairs are not cheap. There was a need for a solution, and the fix and flip loan was designed to meet that demand.

A type of short-term real estate loan is a fix and flip loan that allows an investor to buy and remodel a home in order to sell it for a profit within 12-18 months. The loan will be used to buy the house, pay for the renovations, and cover any other costs associated with owning a home.

How does a fix and flip loan differ from a home loan?

There are various ways that fix and flip loans differ from home loans:

1. A fix and flip loan term range from 6 to 18 months

Unlike a traditional home loan, which is normally  amortized over 15 or 30 years, a fix-and-flip loan requires interest-only payments monthly for a period of 6 to 18 months.

Because most fix-and-flip lenders don’t charge penalty fees for early loan repayment, as soon as the property sells you can pay off the debt, and if you require more time to finish the flip, many lenders will grant 3 to 6-month loan extensions to qualified borrowers.

2. Fix and flip loans are financed on high-Interest rates

When you borrow from a standard mortgage lender, your interest rate will be much lower than when you borrow from a hard money lender, and the origination charge will normally be only one or two points (1 percent to 2 percent of the loan amount). A fix-and-flip loan will have a higher percentage rate, and the origination cost could be two to four points (or more).

3. Instead of private property or credit, the residence serves as collateral

A traditional mortgage lender would most likely have stringent restrictions for the property’s condition, and the loan amount you may get will be restricted by your creditworthiness and the property’s as-is valuation.

The as-is condition of the asset is irrelevant for fix-and-flip loans if the after-repair value (ARV) is enough to explain the loan amount. Because the property is purchased with the intention of fixing it up, it is frequently in poor condition—which is to be expected by the fix-and-flip lender.

Benefits of fix-and-flip loans

Real estate is the finest performing investment in modern history if you didn’t already know. This is because it offers benefits that no other type of investment can match. Anyone, not only the already wealthy, can now generate real wealth and get the benefits of real estate investment.

The advantages of taking out a fix and flip loan can’t be stressed if you’re interested in flipping a house.

1. More efficient process

The processing and delivery of a standard house loan can take up to a month. Fix and flip loans, on the other hand, are handled much faster, usually within a week or ten business days at the most.

2. Risk is reduced

A standard house loan requires you to put your personal credit and property up as security. The property for which the loan was provided serves as collateral for a fix and flip loan. This provides a safety net for the buyer, as you will not lose your home or other personal property if the worst happens.

3. More adaptability

Traditional banking institutions have specific regulations, processes, and structures that fix and flip loans do not have to follow. You can definitely get a fix and flip loan even if you don’t qualify for a regular loan.

The drawbacks of fix and flip loans

1. High Interest Rate

There is one major drawback of taking out a fix-and-flip loan. Because these loans are intended to be used for a limited period of time, they have high-interest rates.

The high-interest rate can become a severe burden on the borrower if the refurbishment takes longer than expected or if the renovated property is on the market for an extended period of time.

2. Demand is low

You might be disappointed if there is a drop in demand for houses and properties. It’s worth noting that the longer you keep the property, the more money you’ll end up paying for it. And this can add up to a lot of money in your pocket.

To keep a property, you have to pay for its routine maintenance, marketing, and mortgage costs among others.

So, if you find yourself in a difficult real estate market after repairing a house, you may only need a lot of patience, hard work, and connections to sell it for a reasonable price.

3. In the process, you could lose money

There are various things that can cause your property flipping business to fail. You can end up with a failed business if you can’t strategize adequately or if you overlook critical aspects in fixing and flipping a house. Here are some factors that could cause you to lose money:

Unforeseen Expenses: Expenses that may arise as a result of delayed materials, permission issues, unexpected damages, or expensive materials, will cost you a lot more than expected.

Difficulty Selling: The longer your home stays on the market awaiting a buyer, the more money you’re losing.

Costs are undervalued: A specific budget is required for a successful fix and flip firm. If you make a mistake with your budget estimate for some reason, you could be caught off guard right in the middle of the process.

What is the profit you can make on a fix and flip?

Building a strong house-flipping business takes effort, however, it can also be incredibly lucrative. A competent house flipper may expect to earn an average of $25,000 each house, and typically more. If you fix and flip ten properties per year, you’ll make a profit of $250,000.

Tips for getting a fix and flip loan

Choosing a reputable lender for your fix and flip financing is critical. Here are a few things to think about.

1. Drawings for construction

Construction draws are sums of money paid to a house flipper to be used for particular construction projects. In some cases, lenders may only release funds while the work is being done or after it is finished. A construction holdback is what it’s termed. Always check ahead of time to see how quickly a lender will release the funds to you.

2. Reliability and experience

What is the length of time that the lender has been in business? Are they trustworthy? Has anyone you know previously worked with them?

A good lender may also be able to refer you to trustworthy contractors. Reading online reviews is a great approach to acquiring an unbiased opinion.

3. Be aware of all costs

There are numerous fees associated with repairing a home. Aside from the purchase and refurbishment expenditures, the following are the included expense:

  • Costs of transportation
  • Costs of selling
  • Costs of project cushioning

4. Requirements of lenders

Lenders have different requirements. Before you sign up with a lender, be sure you understand their conditions.

5. Plan out your project

Create a precise schedule that includes all of the tasks to be accomplished, the start and completion dates for each step, and an estimate of how much each stage will cost.

Qualifying for a fix and flip loan

Unlike a regular home loan, where the lender is primarily concerned with your personal assets and ability to repay the loan, qualifying for a fix and flip loan is far more concerned with the value of the property you are flipping and your business plan.

The loan-to-value and loan-to-cost ratios are what a lender will look at. Will the property’s ARV justify the loan?

When approving a mortgage, lenders will look at the LTV ratio to see how much risk they’re taking on. When applicants seek a loan for a value that is close to or equal to the assessed value (and so has a high LTV ratio), creditors believe the loan is more likely to default.

In commercial property, the loan-to-cost ratio, or LTC, is often used to measure the percentage of a construction or renovation project’s loan amount that represents the overall project cost. The purchase price, materials, labor, and insurance charges are all examples of costs.

ARV is a crucial component for real estate investors who flip houses since it assists them in determining the value of certain properties in order to optimize profit and return on investment (ROI)

How Does ARV Work?

ARV is often employed in home flipping, a short-term real estate investment method in which a person buys a property (typically a “fixer-upper” or distressed property), repairs and renovates it, and then sells it for a profit.

A real estate investor will hunt for a home with a lower purchase price than its anticipated ARV and remodeling expenditures to ensure they will have a high enough profit margin.

ARV is also a key figure for lenders (typically private or hard money lenders) who offer ARV renovation loans to distressed property buyers. In general, lenders calculate the maximum amount for an ARV loan based on the property’s after-repair value (rather than the asking price or current value). The ARV is then assessed by a lender-approved appraiser to calculate the final loan amount.

Applying for a fix and flip loan

A ‘fix and flip loan’ is a term that refers to a variety of lending and finance possibilities, including:

  • Home equity loans
  • Cash-out refinance
  • Individual lenders
  • Hard money loans from a private investment group
  • Crowdfunding through certain niche websites

Despite the fact that there are other options, hard money loans are thought to be the greatest fix and flip alternative. This is because, unlike the possibilities offered by regular financial institutions, hard money fix and flip loans are tailored to the specific demands of real estate investors.

1. The Documents Required

You will be required to produce certain documentation, as with any loan application. These could include the following:

  • A driver’s license or other government-issued identification is required.
  • Statements of account
  • Returns on taxation
  • A sales deal that has been completed
  • Other flip and fix jobs you’ve performed should be documented (if applicable)

Some of the documentation you’ll need to present will be determined by the investor you choose.

2. Requirements for credit score

Even if your personal credit or property isn’t being used as collateral, an investor will check your credit score to determine how well you’ve paid your bills in the past.

However, a strong credit score is not required for fix and flip loans. A credit score of a minimum of 600, which is considered fair credit, is usually enough to qualify the criteria. Typically, the higher your credit score, the greater your chances of getting a loan authorized, but a perfect credit score isn’t always necessary.

3. There are six different types of fix and flip financing

Borrowers can use six different sources of finance to flip a house:

  1. Loan Ranger Capital, a private investment organization, offers hard money fix and flip loans.
  2. Crowdfunding using specialist websites, which provide a type of hard money loan with (typically) less restrictions.
  3. Individual lenders that use their own money to make hard money loans.
  4. Traditional institutions’ home equity loans (HEL) or home equity lines of credit (HELOC) provide some possibilities, but they are less flexible and liberal.
  5. By basically remortgaging your own house, a cash-out refinance from a regular bank will provide some extra dollars.
  6. A purchase line of credit is similar to a home equity line of credit, except it requires more personal security. For newer flippers, these are frequently not realistic solutions.

4. Procedure for obtaining hard money fix and flip loans

The process for obtaining a hard money fix and flip loan does not have to be difficult, depending on the company you choose.

  • Complete an application form.
  • A thorough loan proposal is sent to you.
  • To acquire a pre-loan approval, you must submit us with documentation.
  • The underwriting has been completed.
  • The paperwork is signed, and you get your money.

Bottom Line

Fix, and flip loans are a terrific method to get your foot in the door of the real estate market and start making money. Because they were created expressly to flip a house, the most frequent is hard money fix and flip loans.

However, it’s critical to understand all of the charges and select the best lender for your circumstances. Whether you’re a novice or a seasoned house flipper, you should always look for a reputable lender for fix and flip loans.