Are you thinking about starting your own fix and flip project? Are you curious to learn more about the different types of house flipping financing options? Rehabbing a home and turning it for a profit is an exciting project to take on, but there are a few things you will need to keep in mind.
For example, you will need to figure out how to pay for the property and the materials required to complete your project. On top of that, you will need to have excellent time management skills.
If you are looking for more information about your available lending options, you came to the right place! This brief article will go over the different financing options you have and who you can contact for more information!
Using Your Own Money
Before we get into the different types of loans you can take out for your house flip project, let’s consider an all cash option. If you have a large amount of money that you can invest, you can write a check to purchase the house. Paying with your own cash has its benefits, but there are also a few cons you may want to consider.
Pros of Paying With Cash to Flip
Many sellers like cash offers because of the flexibility it provides. When someone pays with cash, the seller knows that there aren’t any financing contingencies that could prevent the deal from going through.
Close the Deal Faster
When you offer cash, there is no need to wait for lender paperwork or appraisals. If you choose to inspect the location, that may delay the deal further. If you offer cash, you won’t have to worry about waiting for an inspection from a lender.
Cheapest Method
Using your own money instead of obtaining house flipping financing helps eliminate any lender origination fees. You also have the opportunity to cut out any interest payments since there is no loan involved.
Cons of Paying With Cash
One of the biggest cons of paying out of your own pocket would be that it is much harder to scale. Unless you have millions of disposable income that you can use to fund your projects completely, you will have a more challenging time scaling your business.
Another scenario you should consider is what you plan to do with the flip once it is complete. Will you sell it or refinance it?
If you plan to refinance your property into a long term loan you may be subject to a seasoning period if you purchase the property using cash. Typically, if you use cash, you have to wait six months before lending institutions will refinance the property at its new value. If you buy the property using debt, you can usually refinance within three months using the new value. There are also options to do “delayed purchases” which means you can refinance before the three or six month mark, but the loan amount is driven by the cost basis (purchase price and rehab costs).
Hard Money Loans
If you don’t have thousands of dollars laying around to pay cash for your properties, you can opt for a hard money loan. These loans are specifically curated for real estate investors and those who enjoy flipping houses.
The fantastic thing about hard money loans is that you can close pretty fast. The average time to close on a hard money loan is within a couple of weeks.
Hard money loans base their terms of approval on the value of the property you wish to purchase. This property will also be the collateral if you default on the loan.
If you are looking to obtain a hard money loan, you will need to reach out to a private company to apply. Traditional lenders do not offer hard money loans.
Pros of Hard Money Loans
As mentioned earlier, hard money loans have a quicker approval time than traditional home loans. Private companies which offer these loans make their decisions faster because they are more concerned with the property you wish to purchase. These lenders don’t necessarily focus too much on your creditworthiness.
Larger Loan Amounts
Most conventional loans offer you loans based on your credit score and other significant factors. With these limitations, traditional lenders use that data to decide how much house you can afford.
Hard money lenders focus more on the property’s value, and they can offer you more than any conventional lender could. Some hard money lenders also provide you financing for the rehab if needed. Make sure to reach out to your lender to obtain more information.
Investor Friendly
Hard money lenders aren’t as concerned with receiving your monthly payments when flipping a house. If you need more time to pay back the loan, you can always reach out to the lender to ask for additional help. If you default on your loan, the hard money lender will take back the home and resell it themselves.
Lower Credit Requirements
In general, hard money lenders provide loans to those who have lower credit scores. Even if you have a score of 620, you may still be able to receive a loan.
As stated above, these lenders are more concerned about the property’s value and not your credit score. If you default on the loan, the lender knows that they can take back the home and resell it.
Cons of Hard Money Loans
One of the biggest cons of hard money loans is that hard money loans sometimes have lower loan-to-value ratios than conventional loans. For example, let’s say a home is appraised to be about $200,000 in value.
With a conventional loan, a lender may offer you a loan for around $180,000, leaving you with a $20,000 down payment. This would mean that the loan to value ratio (LTV) is 90%.
Most hard money loans have an LTV of around 50% to 90%.
Higher Interest Rates
Because hard money lenders are more concerned with the property’s price and not the borrower’s creditworthiness, these loans have higher down payments. Some hard money loans can have interest rates between 8.0% to 15.0%. Do note that these types of loans are interest only. This means you will only be making interest payments per month. At the end of the term (typically 12 months) there will be a balloon payment (outstanding principal).
Although these interest rates may be higher than average, you won’t have to worry about the high rate if you can rehab the house and quickly sell it. Many experienced house flippers don’t worry about the LTV or the interest rate because of how quickly they can rehab and sell their properties.
Local Community Credit Unions
Another great option that you can use for your project is loans from your local banks. These community banks or credit unions lend you their own money instead of lending money insured by Fannie Mae or HUD. This allows you to have more flexibility for a local house flip project.
Pros of Local Banks
The rates of your loan are more affordable when you obtain a loan from your local bank. These lenders may be more willing to provide you a loan to rehab houses in their neighborhood because you are building up the community. These lenders also know about the local market.
More Flexibility
Loans from your local community credit unions are not government insured, making it more flexible to lend for local projects. There aren’t any strict underwriting requirements that many conventional loans are held to.
Cons of Local Bank Loans
Although these loans don’t have strict underwriting requirements they need to meet, they still take longer to approve than hard money loans. They still may be able to close faster than a conventional loan.
Relationship Based Lending
Before you can request a loan from these local banks, you will need to have some form of a relationship with them. This fact can also serve as a pro because it may be easier for you to apply and receive a loan if you already have a relationship with a community bank. If you don’t already have a relationship, you will need to build one before obtaining a loan from your local bank.
Traditional Loans
Obtaining a traditional or FHA loan for your house project is not impossible, but it is a bit harder than a hard money loan. Traditional lenders have to adhere to strict underwriting standards established by Fannie Mae, HUD, and FHA.
These standards make it harder to lend money for a house flip because most rehab projects are unlivable homes. In order for you to receive a loan from a conventional lender, the house needs to be in a livable condition.
Pros of Traditional Loans
Conventional loans offer you the most attractive interest rates in the market. Depending on the terms of your loan, your rate can be around 4% to 6% of the loan.
Smaller Down Payment
The down payment varies depending on what type of loan you apply for. For example, if you apply for an FHA loan, you may only need to put down 3.5% of the home value.
Cons of Traditional Loans
Conventional loans have slower closing times. The closing process can take anywhere from 30 to 60 days, which can be a pain if you want to close quickly.
Strict Underwriting
As mentioned above, conventional loans have strict underwriting requirements, making it almost impossible to receive approval for flip projects. Most traditional lenders require you to have excellent credit before they extend the loan. They will thoroughly review your credit and your income to determine if they can provide you with a loan.
Cost to Flip a House
Before you take on a house flip project, you will need to make sure that you consider the project’s entire cost. House flip projects are more than just obtaining a loan from a lender. You will need to take into consideration any possible additional fees that may pop up during the rehab.
Renovations and Repairs
When you look to fix and flip a house or renovate the structure of a home, you will need to pay for the materials and equipment. If you have other people on the site to help you complete the project, you will also need to consider labor costs.
Other costs you will need to keep in mind:
- Waste removal
- Demolitions
- Maintenance
Not every house rehab project is the same, so you will need to prepare an extra cushion of money to cover any unexpected hiccups.
Scheduling issues and overspending your budget are common reasons why many fix and flip projects fail. Make sure that you have a well thought out exit plan for your project.
Homeowners Insurance
It is imperative to factor the cost of a homeowner’s insurance policy into your budget. This policy helps provide a financial safety net just in case any damages or losses happen to your property. Before you start fixing your property, make sure that you reach out to your insurer of choice to ensure that the home has the applicable coverages.
Utilities
As a real estate investor, you will also need to consider any costs associated with gas, electricity, and water. You may need to pay for these utilities while your house sits vacant.
Other utilities you will need to consider:
- Sewage
- Trash
It would be in your best interest to reach out to local utility providers and other real estate agents to see the average cost for utilities. You can use this information to install smart thermostats or solar panels to help cut back on energy usage and other expenses.
Additional Possible Expenses
In addition to the materials and labor costs of making the home livable, you will need to consider any added features. For example, maybe you want to use certain materials for the carpet or the cabinetry.
These additional materials can run up costs quickly, so make sure that you have a layout of the types of materials you want to use.
You also will want to keep in mind any taxes associated with your property. For example, there are capital gain taxes and property taxes you will need to pay.
The Best House Flipping Financing
Now that you know more about the different house flipping financing options available to you, it’s time to get started! Fix, and flip projects are fantastic lucrative investment opportunities, especially if you have a plan and have knowledge of the market area.
It is vital to review all your options and create a solid plan for your project. Contact us now if you are ready to start your fix and flip journey and need more information on house flipping loans.
