If done correctly, there’s a lot of money to be made in the house flipping business. That being said, the costs associated with buying a house to flip and completing the associated repairs/renovations can be prohibitively expensive.
If you’re looking to start house flipping, it’s important to know the market and to have a plan. It also helps to have some funds of your own available to cover unexpected costs and make you less of a risk to lenders. While house flipping can be a lucrative investment opportunity, it’s not for everyone.
Here’s a quick guide on the most common loan options for a house flip.
Traditional Bank Loan
Your local bank may be the first place you look for a loan. Acquiring a fix and flip loan from a bank is going to be similar to getting any other kind of mortgage loan. You’ll decide how long you want the loan term to be, put up the appropriate down payment and the bank hands over the cash. Although that sounds overly-simplified, getting a loan from a bank for a house flip isn’t always an easy proposition. First, you’ll need good credit to qualify for a loan. Beyond that, the bank may be cautious when considering to lend you money if you don’t already have a track record of successfully flipping houses.
Bridge loans are short-term loans that investors use in the interim while they are in the process of securing longer-term financing. Bridge loans are often made at higher interest rates, with the tradeoff being that you can secure funding more quickly while waiting to get the money from something like a mortgage. The proceeds from the mortgage are then often used to pay off the bridge loan.
Bridge loans can be risky, though. If your long-term financing falls through, you’re stuck paying a short-term loan at a higher interest rate.
Hard Money Loans
Hard money loans are a common type of loan used in house flipping. These loans can be easier to qualify for because the lender isn’t necessarily looking at your credit. The lender may pull your credit to get an understanding of your Debt to Income (DTI) ratio, but they’re usually not looking at the score itself. The amount of equity you have in the home is also important for these types of loans, so a higher down payment may be required.
You might consider getting a hard money loan if you’ve been turned down for traditional financing, but there are some minor drawbacks. Hard money loan interest rates are generally higher than traditional bank loans, which makes them a more expensive option. The shorter payoff period also means you might feel pressured to sell your flipped house quickly to avoid a big balloon payment.
Home Equity Loans
Home equity loans are an option for investors who want to make use of the equity they currently have in their home to invest in a property flip, but who don’t want to touch their primary mortgage because they like the terms of their current loan. It’s a second mortgage with a separate monthly payment.
The main disadvantage of a home equity loan is that rates tend to be higher than primary mortgages because the primary mortgage lender gets payback preference in the event that you default. Due to this, it’s critical to do the math and determine whether this is a cost-effective option for you.
How does one qualify for a house flipping loan?
Qualifications for fix and flip loans are different from traditional mortgages. Essentially, when you apply for a traditional mortgage (to purchase a home to live in), the deal is mainly about you. Of course, the property has to meet some sort of appraisal standard, but traditional mortgages mainly rely on your ability to repay the loan. Conversely, qualification for house-flipping loans is more focused on the property itself and your business plan for it. For instance, does the home’s after repair value (ARV) justify the loan? Are renovation budgets and timelines realistic? Basically, the loan to value (LTV) ratio and loan to cost (LTC) ratio are likely to be more important to a lender than your income and personal assets.
RCN Capital | Fix and Flip Loans
RCN Capital offers short-term and long-term financing options for real estate investors. Our ARV loan program offers financing for up to 90% of the purchase price + 100% of renovation costs, not to exceed 75% of the after repair value. If you’re interested in fix and flip financing from RCN, feel free to contact us today to start a conversation. You may explore criteria and start the application process here.