The Ultimate Guide to Fix and Flip Loans: A Guide for Successful House Flipping
If you are looking to buy, renovate and then sell on properties for a profit, it is essential that you have a good awareness of Fix and Flip loans which allow you to do this. This detailed guide helps you understand everything about these loans, including what you need to meet the requirements for them, and how to secure the best deals. Let’s take a closer look to help you get started on your real estate journey:
Understanding Fix and Flip Loans
Fix and flip loans are great short-term financing options that are designed specifically for those who won’t be keeping a property for long as they aim to sell it onwards. The majority of mortgages are great for normal homebuyers, but long fixed terms are not ideal for those looking to flip the home they are purchasing. Fix and Flip loans are ideal, as they provide access to the funds that you need, without tying you into a long term. Instead, they allow you time to renovate and sell for a profit, before being paid back – this offers you extra flexibility that traditional mortgages do not have.
Generally, fix and flip loans are provided by hard money lenders or private lenders rather than traditional banks that offer normal mortgages. Instead of solely focusing on the borrower's credit background, they are more likely to focus on the value of the property that you are looking to buy, and the potential profit that can be made after renovations. This makes fix and flip loans more accessible to those who may not necessarily qualify for standard mortgages.
Why Choose Fix and Flip Loans?
Compared to a normal mortgage, fix and flip loans come with a lot of benefits for house flippers. They are popular due to:
1. Quick Approval and Funding: Generally, these loans take less time to be processed than traditional mortgages. This means that investors can act quickly on properties that may sell quickly in the competitive market of real estate.
2. Flexible Terms: Many flip and fix loans have a number of flexible terms that can be tailored to your project. This could include interest-only payments during the renovation stages, freeing up more money for your project.
3. Tailored to House Flipping: Fix and flip loans are specifically for flipping houses, and therefore they understand the business of buying and selling property. They look at the after-repair value (ARV) of the properties, instead of just what they are worth just now. This helps ensure that you can be loaned an amount that matches the future value of the property.
Fix and Flip Loan Requirements
There are a number of specific requirements necessary in order for you to access a fix and flip loan. These can vary by lender, but there are some general criteria:
Credit Score
Traditional mortgage lenders do look for a high credit score when handing out their mortgages. However, fix and flip loans can be a little more lenient. However, if you are looking for a good fix-and-flip loan with excellent terms and a good interest rate, a good credit score is still beneficial. If your credit score is lower than it should be, there are some lenders that will lend based on the value of the property rather than the credit score.
Experience
As you can imagine for projects like this, lenders prefer borrowers that have experience in flipping homes as this makes them a safer bet. However, if you don’t have experience, don’t worry – they also appreciate a solid plan of what you are going to do to improve the value of the property you are buying.
Down Payment
Usually for flipping homes, you are looking at a down payment of between 20 and 25% of the property. This can vary depending on the vender and the condition of the building you are buying.
Property Assessment
Lenders will want to assess the property you are looking to buy, as this helps work out the ARV and how much they are willing to lend you. This helps lenders work out the potential profit of the project to help decide the terms of the loan.
Steps to Secure a Fix and Flip Loan
There are a number of different steps when securing a fix and flip loan:
1. Research Lenders: Search for lenders that specifically loan to those looking to flip houses. Local lenders who know the market in your area are a good idea as they will understand the market better. Compare different lenders to find the best interest rates and terms.
2. Prepare Documentation: You will need to gather all the documents that the lender asks for – including proof of income, tax returns and information about the property you are looking to buy. Being prepared with all the necessary information will make the process faster.
3. Submit an Application: Your application should include details about your renovation plans, the costs of this, and the expected profits to allow the lender to see that you know what you are doing.
4. Property Appraisal: Your lender will conduct their own appraisal of the property you are looking to buy. This will help them determine your loan terms and the amount they are going to lend you.
5. Approval and Funding: After your funds have been approved, they will be in your account quickly to complete the sale. This will allow you to start renovations. Make sure that you understand the terms, the interest rate and any fees due.
Tips for Fix and Flip Loans for Beginners
Here are some of our best tips and tricks for those applying for a fix and flip loan for the first time:
Start Small
In order to gain experience and build your confidence, start with smaller, less risky projects. This will help you build some capital for larger projects in the future. Small projects can also be completed faster, meaning that your financial exposure is reduced.
Build Your Contacts
Make sure that you keep connected to the real estate agents, contractors and lenders who can help assist with your current project, but also future ones. These contacts can come in handy later down the line and may be able to give you valuable insights, referrals and support.
Plan Extensively
Make sure that you plan your project in detail, including having an emergency fund for unexpected costs. This will make sure you stay within budget.
Do your Research
Make sure you do your research on the real estate market in the area you are buying in, this will allow you to make informed decisions on the value of properties in the area, and what buyers are looking for. This will help you during the buying and renovation stages of your project.
Common Mistakes to Avoid with House Flipping Loans
Using fix and flip loans can give you a great opportunity to grow your property flipping business. However, there are some mistakes that flippers often make that should be avoided. Firstly, ensure that you do not underestimate costs as this can lead to big financial strains. Instead, make sure that part of your budget is kept aside for unexpected costs so that you can afford to see your project through to the end.
Secondly, make sure that you do not borrow too much money – as this can cause strain if your project is delayed or does not sell quickly. Make sure that you can manage loan repayments if the process takes longer than expected.
Finally, make sure that you keep up to date with real estate trends. Changes in the market can impact your investment so it is important to stay informed.
Fix and Flip Loan Options
There are several loans for flipping houses available. Let’s take a closer look at what they all are:
1. Hard Money Loans: Hard money loans are often used by house flippers as they are asset based. They are often approved quickly – which is ideal for moving quickly, but they do come with higher interest rates. They are a good option if you are looking for money fast, but are confident in the profitability of your project.
2. Private Money Loans: Private money loans come from private investors rather than traditional banks. Because of this, they offer more flexibility meaning you can tailor the loan to your particular project. If you know an investor who is willing to back your projects, this may be the best option for you.
3. Conventional Bank Loans: While these loans aren’t just for flipping a house, there is also the option to go down the traditional banking route. These loans tend to have lower interest rates but often have a longer application process. You will need a good credit for these types of loan.
Conclusion
Flip and fix loans are a great way for real estate investors to get the funds they need to pick up their next project. In order to find the best one for you, it is important to understand how they work, and what type of loan works best for your own situation. Shop around and find the best deal for you – so whether you are lookin for fix and flip loans in Minnesota or anywhere else, thorough research and careful planning are needed to help you make a sound financial decision. We hope our advice above has helped you understand how to get a loan to flip a house – so get started today.