How to Get a Fix and Flip Loan

In January, DIY Network officially became Magnolia Network and launched “Fixer Upper: Welcome Home”. The series shattered TV rating records drawing in more than 1.7 million viewers.

Shows like this are what caused the uprise in fixing and flipping homes. But, the process isn’t as easy as it seems on TV. First, you need to qualify for a fix and flip loan.

Fix and flip loans are short-term loans for real estate investors looking to purchase or renovate a home before selling it to make a profit. These loans are used for business endeavors, not personal use.

Fix and flip loans have short-term periods, usually around 6-18 months, to cover expenses. These loans can cover remodeling costs and the home mortgage.

These are interest only loans and the principal is due at the end of the loan term.

Keep reading to learn how to get a fix and flip loan.

Types of Fix and Flip Loans

To understand how to get a fix and flip loan, you need to know the different types. They will each have their own requirements based on the lender you find.

There are eight main fix and flip financing methods that we will discuss.

Hard Money Loan

A hard money loan is one way to fund your next house flip. These loans are best for experienced investors that have completed fix and flips in the past.

People who cannot qualify for a conventional loan due to bad credit might be able to get a hard money loan.

Hard money loan lenders are not banks. Instead, they might be online lenders willing to provide you with the money you need.

Hard money lenders have more lenient eligibility requirements so you may qualify even with a bruised credit score. Plus, you are likely to receive the money quickly so that you can start your fix and flip right away.

The downside is that hard money lenders tend to have higher interest rates than other loan types. However, they do offer shorter repayment terms so you won’t have to worry about interest growing over longer periods of time.

Cash-Out Refinance Loan

If you have an existing property that can help you fund your flip purchase or the renovations, you can use the cash-out finance loan strategy.

With this method, you’ll take out your current home’s equity to get a new loan and pay off your existing mortgage. You’ll use the leftover money to finance your flipping project.

For this fix and flip lending option to make sense, you should have at least 30%-40% equity in your home. If not, a cash-out refinance loan would be more costly compared to other loan options.

Home Equity Line of Credit (HELOC)

A home equity line of credit (HELOC) provides you with a financing source based on the home you currently own, not the one you intend to flip.

HELOCs are secured by your house and potentially get you financing for a low-interest rate. It works similarly to a credit card where you’ll take out what you need up to the credit limit you are assigned.

A home equity line of credit is based on the equity in your home. Home equity is calculated by the value of your home minus the mortgage amount you owe.

HELOCs are available to those with at least 20% equity in their homes. You can borrow up to 85% of the equity in your home.

Seller Financing

There are some cases where you might be eligible for seller financing. Using this approach allows the borrower to work with the seller to create a payment plan contract.

Instead of paying a lender, you’ll make payments to the seller of the home you want to flip based on your agreed schedule and the price you’ve set with interest.

This method of financing poses a higher risk for the original property owner so you’ll have to pay a higher interest rate with a short loan term. If you can’t secure other financing options, this is a possible alternative.

Investment Property Line of Credit

An investment property line of credit is similar to a HELOC because you’ll be able to borrow against your real estate investment property’s equity. Your property serves as collateral for the funds much like a house would in a HELOC.

To qualify for this line of credit, you’ll need good to excellent credit and be a successful real estate investor. You’ll also need to own the property for at least a year before becoming eligible for this line of credit.

Bridge Loan

Bridge loans are useful for the fix and flip loan process because they can cover the gap between when you can secure long-term financing and when you want to buy a property.

For example, bridge loans can help cover down payment costs while you focus on finding additional financing options to pay for the rest of the mortgage.

Since these loans are typically secured by collateral, you might qualify for a low-interest rate compared to other loan options. They are also easier for borrowers to qualify for.

Permanent Bank Loan/Online Mortgage

Fix and flip financing gets more complicated if you plan to live in the home while you are renovating it. This method only makes sense for renovations that are expected to take five years or more to complete.

You’ll opt for a regular mortgage with a fixed interest rate from a credit union or traditional bank in this case. These are long-term as you’ll have up to 30 years to make payments on the loan.

To qualify for a mortgage, you’ll need good to excellent credit, stable income, and money saved to make at least a 20% down payment.

Business Line of Credit

The last of the fix and flip lending options is a business line of credit. These are usually reserved for experienced real estate flippers that have created a company based on their portfolio of work.

These individuals have completed past deals and have made significant profits.

A business line of credit is another option that provides you access to a revolving credit line. You can use up to a set amount and make payments, including interest, on the amount you use.

This financing method is useful for flippers because you can tap into your credit over and over again. If issues pop up, you don’t have to worry about looking for additional loan methods.

Banks and other lenders offer business lines of credit but to qualify you’ll need excellent credit and a successful flipping history under your belt.

The Cost of Flipping a Home

New real estate investors on a journey to get a fix and flip loan should know the costs involved in the process. It’s important to factor in the price of the home and the remodeling costs to ensure you apply for adequate coverage.

Renovation costs might throw a wrench in your plans because they tend to be higher than flippers originally account for. These are the costs to consider:

  • Cost to buy the home
  • Renovation funds
  • Property taxes
  • Utilities
  • Homeowners’ insurance

If you purchased a fixer-upper in a neighborhood with an HOA, you’ll also need funds to make those payments monthly or quarterly.

It’s best to have a safety net with funds to cover unexpected costs that might arise during the project.

Once the home is complete and ready to sell, you’ll want to pay for marketing to get the word out about an open house for sale. Selling and closing costs are important to consider when calculating the funds you need as well.

Where to Look for Lenders

After deciding on a loan type and calculating the funds needed to fix and flip a home, you can begin looking for lenders.

You can find lenders online but it’s important to research and vet them before signing a loan agreement. Online private lenders are easy to find but you can also seek them out at local real estate networking events.

Private lenders are common and operate like hard money lenders but typically offer better terms and rates.

Private lenders are sometimes open to negotiating payment terms and might act as a partner in the fix and flip process. They take a first position lien on the home as a bank or hard money lender does.

If you know other flippers in the business, ask them if they have experience with certain private lenders you are interested in working with. These questions go a long way in helping you decide on a private lender:

  • How quick was the turnaround?
  • What pricing did they receive?
  • How responsive was the lender?

You can also ask the lender directly for references if you don’t know anyone in your network.

This is the same process you should complete no matter the type of loan or lender you choose. Always research and ask enough questions about the loan rates and terms.

How to Get a Fix and Flip Loan

To get a fix and flip loan, you have to meet lending requirements based on the loan type you choose.

In general, you’ll have to disclose your credit score, income, and credit history. Proving eligibility also means making a certain down payment amount.

The key to getting a fix and flip loan lies in finding a property that needs improvements and can be sold for a profit once those improvements are made.

Lenders for fix and flip loans are most concerned with the profitability of the project you want to finance. Calculate the after-repair value (ARV) to show lenders that the property is worth investing in.

Here are some additional tips that can help you get a flip and fix loan:

Find a Local Lender

When you get a loan, it’s best to find a local lender in your area if you want them to be a true business partner involved in the project.

Local lenders are also more knowledgeable about the local market. They may be aware of real estate trends in the area and connect you with contractors.

Find a Reliable Lender

If you can’t find a local lender, that’s fine. As long as you work with a reliable lender, you’ll get the funds you need to complete your flipping project.

As stated before, you can find lenders online or ask fellow flippers who they recommend.

Check that a lender has a portfolio where they can demonstrate their own financial successes.

Ask About Construction Draws

Construction draws refer to the incremental drawing of funds from the approved amount in your loan agreement.

There are hard money lenders that impose a construction holdback on the loan which means funds aren’t released until the construction work begins or is completed.

Understand how quickly you can receive your funds for construction work before agreeing to work with a specific lender.

Schedule the Project

If you go to a lender without a plan in place, they aren’t likely to fund your project.

Create a detailed schedule of the renovation process and how long you estimate it will take to complete. This involves listing out the work that needs to be done.

Outline what each stage will involve from beginning to end and how much each portion will cost during those stages.

Do You Need a Fix and Flip Loan?

New and seasoned real estate investors benefit from knowing how to get a fix and flip loan.

After learning about all of the financing options, you can calculate your costs and begin looking for lenders. Understand the requirements you need to meet in order to receive funds for your project.

Working with LendSimpli means access to flexible lending rates and reliable loan options. Start your fix and flip loan application now or contact us to speak with a team member who can answer your questions.