A Beginners Guide to Fix and Flip Loans

Fix and flip loans allow real estate investors to purchase and renovate distressed properties in order to sell them for a profit. If you are looking for a real estate investment, this is one of the best options available to consider. But it is important to have a solid understanding of how to get loans for flipping houses. Then you can make the process smooth as much as possible. That’s where this article can help you. With the right financing, flipping houses can be an extremely lucrative investment strategy, even for beginners.

What Are Fix and Flip Loans?

A fix and flip loan is a short-term financing product designed specifically for purchasing and renovating neglected or rundown properties. Unlike a traditional mortgage, fix and flip loans have shorter repayment terms (typically 6-18 months) and higher interest rates to match the quick project timelines of house flipping projects.

With a fix and flip loan, you can buy a property needing repairs, do renovations, and quickly resell the improved home for a profit without needing to qualify for longer-term financing. The proceeds from the eventual property sale are then used to repay the rehab loan. Many new real estate investors get started flipping houses using specialized renovation loans from private money lenders or hard money lenders.

Types of Fix and Flip Loans

When it comes to fix and flip loans for beginners, you need to understand that there are quite a few options to consider. Let’s take a look at the different types of house flipping loans available to you.

·        Hard Money Loans

Hard money loans are the most popular fix and flip loan. Hard money lenders provide short-term financing for up to 75%-80% of a property’s after-repaired value (ARV), including both purchase and renovation costs. Rates often range from 8% to 15% with points and fees.

·        Private Money Loans

Private lenders fund loans similar to hard money lenders but often with better terms. You work directly with individuals investing their own capital versus an institutional hard money lending company.

·        FHA 203(k) Loan

FHA 203(k) loans allow home buyers to roll the purchase price and renovation costs into a low-interest, fixed-rate conforming mortgage. 203(k) loans require strict guidelines and are harder to qualify for than private funding.

·        HomeStyle Renovation Mortgage

Similar to a 203(k), HomeStyle loans offered by Fannie Mae also let buyers finance into one mortgage. These conforming loans are easier to obtain but maximum LTVs depend on the project type.

·        Portfolio Loans

Some banks offer portfolio loans tailored for investors that may finance up to 90% of costs at below market interest rates compared to alternative lenders.

·        DSCR Loans

DSCR (debt service coverage ratio) loans are for professional real estate investors. DSCR calculation allows qualifying based on the project pro forma versus personal income and good credit scores.

Key Terminology in House Flipping Loans

When seeking funding for a fix and flip project, there are some key terms to know. Before obtaining a fix and flip loan Minnesota, you need to be aware of key terminology.

·        ARV (After Repair Value)

The projected property value upon completion of all planned renovations. ARV helps lenders calculate the maximum loan amount.

·        LTV (Loan-to-Value) Ratio

The percentage of ARV (up to 75-80% typically) that a lender will finance for purchase and rehab costs combined.

·        As-Is Value

The current distress property value before improvements. As-is value is used to calculate ARV.

·        Rehab Budget

An itemized list of all planned improvements with cost estimates for lenders to approve. Accurate rehab budgeting is critical.

·        Draw Schedule

Structured schedule dictating when progress payments are disbursed to the borrower throughout the project timeline.

·        Rehab Holdback

Most lenders will hold back 20% of the total loan amount until final completion protecting them from abandoned projects.

·        Costs and Fees

When using private funding, fix and flip loans come with higher costs compared to buying with traditional financing:

Interest rates ranging from 8% to 15% (much higher than conforming rates) Origination fees up to 5 percentage points upfront Extra fees for processing, underwriting, doc prep, etc. Higher closing costs for title insurance and escrow Prepayment penalties may apply. Investors must carefully weigh these increased fees against their projected profits. New flippers should analyze deals thoroughly using rehab cost estimators and ARV calculators first.

Qualifying for Fix and Flip Loans

How to get a loan to flip a house? This is where you need to understand the eligibility requirements. Obtaining funding starts with making sure you meet program guidelines and can qualify. Here are the factors that determine whether you qualify for this type of loan or not.

·        Credit Scores

Most hard money and private lenders allow credit scores around 600 and above. Better personal credit means better loan terms.

·        Experience

Having successfully completed flips or other renovation projects works in your favor. New flippers may need to use a partner or GC.

·        Skin in the Game

Most lenders want to see you have at least 10%-20% cash invested as your own money aka “skin in the game”.

·        Exit Strategy

Lenders look for a realistic exit strategy and short 6-12 month project timelines ideal for house flipping.

·        Property Value

The as-is home value must show adequate room for forced appreciation through renovations and healthy profit margin.

Finding the Right Fix and Flip Lender

Choosing the right lender for your first project gives you the best shot at success. If you fulfil fix and flip loan requirements, you can follow these steps to locate a lender.

·        Ask Around

Speak with active rehab investors in your area for firsthand loan experience. Join local REIA networks.

·        Shop Multiple Lenders

Compare interest rates, LTV, terms, fees, and draw processes. Don't go with the first quote.

·        Read Reviews

Research online reviews and BBB complaints before committing to any one company.

·        Vet Closing Costs

Require lenders to provide accurate estimates and disclosures so no surprise fees arise.

·        Establish Reporting

Maintain constant contact and stay on top of required updates to satisfy lenders.

Tips for First-Time Fix and Flippers

If you’re new to borrowing fix and flip loans, keep these success tips in mind. They can increase your chances of getting house flipping loans.

·        Hire Experts - Assemble an experienced team like a talented GC, real estate agent, and attorney.

·        Get Permits - Don’t try to cut corners avoiding permits and inspections. Unexpected delays risk default.

·        Buffer Renovation Costs - New investors tend to underestimate budgets so pad estimates by 10%-15%.

·        Manage Cash Reserves - Conserve working capital for incidentals that always pop up in rehabs.

·        Know After Repair Value - Conservative ARV projections allow bigger profit margins if sold under value.

·        Stage Improvements - Stick to cosmetic updates first. Major additions or constructions come after.

Analyzing and Selecting Your First Fix and Flip Deal

Finding the right project is critical to succeed on your maiden fix and flip venture. Conduct thorough due diligence before moving forward to mitigate risk, accurately estimate costs/profit, and convince lenders to finance the deal. Let’s take a look at few tips on how to secure the best possible deal available.

Drive the Neighborhood and Assess Properties

As soon as a potential fix and flip candidate is identified, perform an on-site visit to gauge firsthand issues and scope renovations. Make notes as you walk through:

• Foundation or structural problems

• Roof condition

• Functionality of electrical, plumbing, HVAC systems

• Any repairs needed per room like flooring

• Overall layout and design

Research Market Comps (comparable solds)

Leverage MLS records and data aggregation tools like Propstream to analyze recently sold comps with similar beds/baths and square footage post-renovation. Study closed sales over the past 6 months filtering by property type, distance from your target, and condition rating. Comps help accurately estimate ARV to calculate allowable purchase offers.

Create a Renovations Scope and Budget

The rehab budget directly impacts total financing and projected profits. Experienced flippers recommend adding 10-15% buffers minimum into each line item for incidentals. Outline in detail with realistic costs:

• Permits, surveys, testing like asbestos or lead

• Contractor payments, dump fees, temporary power setup

• Kitchen and bathroom overhauls if applicable

• New flooring, painting, landscaping

• Countertops, cabinets, updated light fixtures

• Any structural repair like leaky roofs identified

Higher-end finishes boost ARV but aren’t always cost-effective. Stick to cosmetics providing best ROI. Have contractors review plans for accuracy.

Financing a Fix and Flip Deal

Securing funding for your first flip off a mere proposal is challenging. Lenders analyze numbers closely to mitigate their own risk exposure to unproven investors. Expect greater scrutiny working with small private lenders over institutional outfits.

Provide Detailed Supporting Documents in Underwriting

At minimum, prepare:

• Complete renovation specs and bids from GCs

• Title report showing no adverse claims against the property

• All cost LINE ITEMS with supporting vendor bids

• Documents establishing your team like GC license, etc.

• Comps analysis to back up projected ARV

• Photos documenting required repairs and deficiencies

• Plans for listing & marketing the finished home

The more details provided, the better when seeking loan approval. Many lenders hire independent consultants to validate submitted deals.

Be Transparent and Foster Relationships

A strong referral network leads to better loan terms over time. But integrity and honesty matter most when getting started. Providing accurate information showing realistic exit strategies, experience levels, and rehab capabilities allows lenders to extend capital within reasonable risk parameters. Attempting to misrepresent skills or details to secure funding typically ends poorly. Stay transparent.

Final Words

Funding fix and flip projects allows real estate investors to purchase, transform, and sell homes for profit without needing to qualify for long-term financing. While fix and flip loans come with higher rates and fees compared to buying retail with traditional loans, faster access to capital and flexible underwriting guidelines provide new investors an ideal way to get started flipping houses.

With careful planning and execution, fix and flip loans serve as an excellent funding tool for both new and experienced investors alike to build real estate portfolios and investing businesses over time.