House Flipping 101: Step-by-Step Instructions to Get House Flipping Loans
House flipping is one of the most profitable businesses that you can try as of now. It is all about buying a run-down property, renovating it, and selling it for profit. You don’t need to have a lot of money in your hand to flip and flip houses. Fix and flip loans are there to help you. However, getting a loan approved can be tricky. That’s why we thought of sharing this guide on fix and flip loans for beginners. Continue to read and we will share the steps you should follow to get a fix and flip loan.
Step 1: Evaluate Experience or Partner with Veterans
Seeking loans to bankroll flips as a first timer presents added difficulties most lenders view as elevated risk. This is why you should follow few strategies when getting loans for flipping houses.
• Option A
Document 3-5 previous successful flips you orchestrated fully with details on purchase/sales prices, gross profits, before/after photos, and records verifying payments to suppliers/contractors from each project. This quantifies capabilities and positive track record firsthand.
• Option B
Lacking a proven flip resume personally, partner with an experienced investor who will co-sign on loan responsibilities. Their expertise gets combined with your contributions when lenders assess experience. While still positioned as higher risk than veterans, adding a money partner eases some concerns over successfully executing plans as a new flipper.
Either choice works to satisfy basic experience requirements qualifying for approval—albeit likely at somewhat higher costs or lower leverage initially until directly proving yourself over successive projects.
Step 2: Build a Professional Financial Profile
Beyond evaluating house flipping outcomes, lenders also assess personal financial standing to gauge capacity covering any cost overruns and stabilize obligations should issues arise. Here are some of the things you should work on before getting one of the house flipping loans.
• Credit reports and scores (aim for at least 620+)
• Tax returns - both personal and any business entities
• Current bank/investment account statements demonstrating available capital
• Collateral assets like properties owned with corresponding mortgage details and equity
Shoring up finances and creditworthiness before applying for better positions approval with preferable rates/terms. If weaknesses exist on reports, spending 6+ months actively addressing discrepancies through payments or disputes leads to rebounds increasing borrowing eligibility.
Step 3: Source an Ideal Flip Property
Not all properties make for profitable flips, nor will lenders fund every deal. Before even getting loans for flipping houses, you need to locate the right property. Here are few tips that can help you with it.
• Researching public records to validate ownership before making offers.
• Accurately appraising existing property value through comparative market analyses or licensed appraisals based on location, size, and condition rather than listing prices alone.
Ideally target detached single family or smaller multi-family properties enabling full control over renovations. Contract terms should also include ample contingencies for securing financing plus inspections revealing no major undiscovered defects.
Provide full property addresses, purchase agreements, inspection reports, appraised values, and detailed planned renovation budgets from licensed contractors when formally applying for funding. The more due diligence completed upfront, the less risk perceived by lenders.
Step 4: Explore Financing Options
With the right property and credible background validated, financing flips involves largely securing either:
A) Portfolio Loans from non-bank lenders using their own private capital reserves. Typical terms offer 65-85% Loan-to-Value ratios, 8-13% interest rates, quicker close times, and increased flexibility around borrower qualifications.
B) Hard Money Loans from wealthy individual investors or private lending companies seeking high returns backing riskier deals banks shy away from. Their heavy focus on the deal specifics rather than your financial profile makes closing possible, albeit costlier, with 8-15% rates.
Also consider home equity loans, private money partners, or transactional financing if available. Weigh total costs—interest payments, upfront points/fees, and timeline flexibility against project returns when selecting between programs.
Step 5: Submit a Convincing Loan Package
Now we come to the most important step, which is on how to get a loan to flip a house. Well-prepared applications explicitly detailing the opportunity and strategy distinguish flip funding requests for review. Following are the core components to include in your application.
• Purchase property specifics & proof of ownership
• Scope of work & budget from licensed contractors
• Appraisal validating accurate existing & projected value
• Title report exposing any existing property liens
• 3 comparable sold listings confirming profitable sales potential
• Evidence of necessary permitting if altering structural elements
• Thorough 72-hour contingency plan addressing potential cost overruns, and delays proactively
Quantifying figures plus presenting visuals, robust supporting documentation, and resilience plans assure lenders that funding your request comes with limited downsides even if operating as a newer flipper. This tips approvals favorably.
Step 6: Start Small, Then Scale
When securing your first fix and flip loan Minnesota, you should start small. An ask between $60-150k has better chances getting approved compared to overextending on a massive $500k luxury estate straightaway. Once you successfully complete several small flips hitting projections, lenders gain confidence enabling bigger loans over time. Think long term.
Step 7: Shop Options & Negotiate Terms
Every lender utilizes unique qualifying criteria. Rejections happen commonly. But persistently pitching multiple providers willing to assess your packaged request leads to eventually securing yes’s even as a first-time flipper. Having a broker represent you across programs streamlines this. And never shy from pushing for improved terms once an initial approval comes through. Polite appeals to reduce rates or increase loan amounts often succeed with proof the deal math still pencils profitably.
What Lenders Look for When Underwriting Flip Loans
Unless you can fully self-fund projects in cash, lining up financing is essential to begin flipping houses. And securing any type of loan requires convincing lenders that funding your deal is likely to end profitably. These are some of the fix and flip loan requirements you should fulfill.
Underwriting criteria varies across lenders but typically examines three core areas:
Borrower Experience & Financials
Purchase & Rehab Property Details
72 Hour Contingency Plan
Reviewing these elements helps assure lenders that you can successfully execute and payback your proposed flip project on schedule and according to plan.
Borrower Experience & Financials
At a minimum, most lenders will want to see that you have completed flips generating profits previously. Tracking past project financials including purchased price, total rehab budgets, final sales values, and net profits helps quantify capabilities and outcomes.
Ideally you will have fixed and flipped 3-5 houses or more already using your own money. Being able to document positive flipping experience upfront positions you as lower risk. Expect to provide property addresses, before/after photos, final sales price verification letters, and evidence of payments to suppliers/contractors.
If lacking previous flips, partnering with an experienced flipper as your “money” partner can help ease lender concerns by adding their proven expertise.
Additionally, lenders will review personal financial standing as capacity to cover cost overruns or contribute extra if needed. Customary items examined across loan types include:
Credit score and detailed credit report review
Tax returns - personal + any business entities
Current bank/investment account statements
Mortgage/liens against any real estate assets owned
Purchase & Rehab Property Details
To determine financing eligibility and terms, the physical property you aim to purchase and flip itself gets comprehensive scrutiny from lenders. Exactly what information gets assessed varies by lender type, but common materials required for applications include:
Full address of target property
Details on current owner, price, and listing agent
County tax assessor documentation validating ownership
Comprehensive title report exposing any existing liens
Purchase contract or option terms negotiated
Professional third party comparative market analysis detailing true property value and potential resale comps; Broker price opinions; or appraisal
Scope of work detailing all planned renovations/repairs and corresponding cost estimates from licensed contractors
Evidence of permitting for any structural changes or additions
Carefully sourcing an accurately priced property in adequate physical condition that aligns with your renovation budget and knowledge helps increase lender confidence. Any red flags or concerns uncovered in their review stands as potential deal breakers requiring adjustment before securing loan approval.
72 Hour Contingency Plan
Even seasoned flip investors inevitably encounter unforeseen hurdles across projects - from material shortages delaying timelines to busted budgets from faulty electrical rewiring needing replacement halfway through completion.
Rather than paralyze progress, savvy flippers prepare contingency plans addressing how they would pivot in response to surprises if needed. Common scenarios examined include:
Cost overruns exhausting original rehab budget
Renovation/repair completion delays beyond originally scheduled timeline
Unexpectedly extensive repairs like mold or foundation issues newly uncovered
Sudden illness, injury, or family emergency diverting focus from the project
Thinking through if/how you would leverage other funding sources, cut costs, shift deadlines, or hand-off responsibility if faced with such crises helps strengthen preparedness and proactively ease lender concerns. Even if avoiding needing to activate backups, displaying resilient readiness further minimizes perceived risks of your deal.
Tips For Securing Financing to Flip Your First House
If seeking funding to flip your first investment property or launch a new flipping project, follow these tips to boost loan approval odds and lock-in more favorable lending terms:
• Leverage a Co-Signer or Partner
Add financial strength by bringing aboard a money partner or co-signer to share responsibility for repayment. Their income, assets, credit profile and secured collateral are combined with the primary loan applicant's credentials for review.
• Provide Overcollateralization
Use multiple properties totaling higher asset value as added security to guarantee the loan instead of a single flip home. This demonstrates stronger means to pay back debt obligations.
• Get Skin in the Game
Avoid seeking 100% financing by showing you have existing "skin in the game" through cash reserves or home equity that could be tapped if necessary. Funding the purchase amount for flips upfront while financing only the 70-80% needed for renovations looks more promising.
• Scale Gradually
Understand lenders view first time flippers as higher risk. Keep early deal asks modest - securing financing approval gets easier as you bank successful flips demonstrating capability and reliability.
• Highlight Real Estate Investing Experience
Any previous experience buying/managing investment properties works to your advantage, even if not full home flips. Property rehabs, constructing new builds, owning rentals, and wholesale dealing further attests real estate acumen.
• Shop Multiple Lenders
Each has unique qualifying criteria. With diligence, you can find one that says yes. Having a lending broker represent you across options simplifies the process.
Assembling a convincing loan package can surely help first-time flippers to secure financing. It can open the door to amplify returns through leverage while mitigating downside hazards.
Final Words
Funding deals through lending propels flipping volumes faster. Position loan requests in a convincing way to the lenders that financing your projects represents a wise investment, not just when initially qualifying. Follow these 7 steps with discipline and house flipping financed through leverage unlocks life-changing wealth building potential.