It’s getting increasingly harder to make a good return through real estate investing in today’s competitive market environment. High interest rates are compressing margins on rental properties, and the nationwide housing shortage is still affecting inventory in many markets. That’s why there are more and more investors switching to a home flipping strategy, taking older or neglected properties and transforming them into desirable homes while also making a tidy profit. The success of these projects depends on choosing the right financing though, and this is where specialized fix and flip loans come into play. While conventional mortgages can be used to purchase properties, they aren’t designed to be used for flipping homes like these programs are.
Continue reading as we break down the key differences between fix and flip loans and conventional financing, along with how these programs can help home flippers and lending partners succeed in the space.
Fix and flip loans are a form of short-term financing designed to help investors acquire and renovate real estate properties. Unlike conventional mortgages, these loans include rehab funding on top of acquisition financing, and they have shorter loan periods that are more suitable to the quick nature of these projects. These loans are not typically offered by traditional lenders like banks or credit unions. Instead, investors work with private lenders that are active in the home flipping space, who take a different approach to loan approval. Underwriting is more focused on the viability of the property as an investment than the borrower’s income or credit profile, which gives investors the added benefit of getting loans approved faster.
One of the greatest advantages that fix and flip loans offer is how fast they close. While a traditional mortgage may take weeks or months, fix and flip loans can be approved with funds delivered in as little as two weeks. Private lenders understand the importance of speed when it comes to home flipping. The asset-based approach they take to underwriting means there’s lower documentation requirements, and fewer hoops to jump through to secure approval. This key benefit gives investors a competitive edge in fast-paced markets, where they need to move quickly to secure lucrative opportunities. It also helps investors expand their search into off-market properties, like auctions or foreclosures that have shorter deal timelines.
Investors may run into difficulty securing financing for a fix and flip project if the property doesn’t fit into the strict loan criteria of a standard mortgage. Conventional lenders prefer to finance low-risk, move-in-ready homes as opposed to ones in need of repair, and properties in need of substantial renovations may not qualify at all. With fix and flip loans, however, the underwriting process is built from the ground up with renovations in mind. That means greater eligibility for a large variety of properties and projects, including ones that might have previously been rejected by the bank.
Private lenders are much more flexible with the borrowers and properties that qualify for financing. With a traditional mortgage, approval is based on the borrower’s credit profile and debt-to-income ratio. They generally require 2 years of tax returns at the same job as well as stable, high credit to qualify. Fix and flip loans have far less requirements. The after-repair value (ARV) of the property, experience of the borrower, and scope of renovations is what private lenders are mainly concerned with. There’s a high chance a loan will be approved so long as these numbers check out. Fix and flip lenders may still ask for proof of income and pull credit scores during underwriting, but they’re typically used to calculate loan terms rather than to determine loan approval.
Another massive benefit of using fix and flip loans is the additional funding they provide for renovations. Rehab budgets are included in the loan structure, which improves cash-on-cash returns and allows borrowers to focus their available funds on completing projects. It also gives experienced lenders the ability to fund multiple projects simultaneously. With fix and flip loans, funds are released in a series of payments called draws, each dedicated to a specific portion of renovations. This approach helps keep budgets and timelines on track throughout the investment process. With conventional financing, borrowers will have to secure separate funding for renovations. And as we mentioned, it can be difficult to qualify for a loan at all if the property doesn’t fit into the lender’s guidelines.
Fix and flips loans have a different cost structure from conventional loans due to their short-term nature. They tend to have elevated interest rates when compared to their standard mortgage counterparts, but many lenders offer interest-only options to help borrowers free up liquidity. Traditional mortgages may potentially offer lower rates, but the longer repayment period isn’t suitable for these types of projects. It’s also important to consider opportunity cost; the total profitability of a deal matters more than just being able to secure the lowest rate. Faster execution allows borrowers to move on lucrative deal opportunities that they otherwise might have missed with a conventional loan.
So, if you are a broker or lending partner, when should you recommend a fix and flip loan? For starters, renovation projects that have short timelines are a perfect fit for these programs. Investors in highly competitive markets can also benefit from the additional speed and flexibility these loans provide, allowing them to secure properties more reliably. Finally, if your client is looking into off-market deals like short sales, foreclosures, or auctioned homes, fix and flip loans can be a great solution. Not only does it allow them to move on these properties sooner, but they can also utilize the additional rehab funding to make the upgrades they need to effectively carry out their exit strategy.
If you want to maximize the returns on your next fix and flip deal, partner with a lender that has a proven track record in the real estate investing space. RCN Capital lends to real estate professionals, commercial contractors, developers & small business owners across the nation. We provide short-term fix & flip financing, long-term rental financing, and new construction financing for real estate investors and lending partners. If you are looking to offer fix & flip financing to your clients, RCN Capital has competitive loan options and an award-winning broker referral program available to partners