A lot of people dream of getting into the business of fixing and flipping homes, but funding is the number one obstacle. You need capital to purchase homes and cover the cost of renovations before you can flip them for a profit. In this article, we’ll share with you the 4 best fix and flip loan options:
· Online Mortgage Lenders
· Hard Money Loans / Private Money Loans
· Bank Loans
· Additional Fix & Flip Resources
What makes a good candidate for a fix and flip loan?
· Successfully Completed One Prior Fix & Flip Project
· Have a Credit Score of 650+ (check your score for free here)
· Max Loan Size of 90% Loan-to-Value (LTV)
· Minimum Loan Size of $75,000
We would like to highlight one specific company for fix and flip loans: Level 4 Funding. They’re an online mortgage lender that offer real estate investors 12-month mortgages with interest rates between average 8-14.9% and no prepayments penalties. You can get prequalified in minutes, see your exact rates, and be funded in as little as 5 days.
To get some additional insight into fix and flip loans, we spoke at length with Than Merrill, star of the A&E show “Flip This House” and author of The Real Estate Wholesaling Bible. He’s also CEO of FortuneBuilders and CT Homes, a multi-million dollar real estate businesses. A coach and mentor, he has helped many people who want to fix and flip properties professionally.
Fix and Flip Loans: The 4 Best Financing Options
It costs a lot of money to fix and flip houses. In addition to buying the home, you will need to pay for repairs, contractor fees, listing and broker fees, holding costs until you sell the home, and more. Merrill says there are three main kinds of financing for flipping houses. There’s also a newer fourth option–Online Mortgage Lending–that is increasing in popularity. Here’s when to consider each option:
1. Online mortgage lending – Best for flippers with some experience who need money quickly. Visit Level 4 Funding to learn more about funding your next fix and flip.
2. Hard money lenders – Best for novices or borrowers with a bad credit score
3. Private money lenders – Best for novices or borrowers with a bad credit score
4. Bank financing – Best for experienced flippers who have a great credit score, capital on hand, and significant collateral.
Out of these four options, the best one for you depends on the type and condition of the property, your experience with real estate investment, and your personal financial situation. Below, we discuss each of these fix and flip loan options in more detail.
Option 1: The Fastest Option: Online Mortgage Lenders for Real Estate Investors
Online Mortgage Lenders Summary
Amount of financing available 90% of the Loan-to-Value (LTV) or 75% of After Repair Value (ARV)
Minimum qualification criteria Debt-to-Income Ratio under 50 %, 650+ personal credit score, no bankruptcy or foreclosures in past 2 years, and at least 1 profitable house flip.
Paperwork you have to submit Purchase contract, estimated sales price, preliminary title report, repair estimate, personal financial statement, past projects
Interest rates 8-14.9%
Time to get approved 1-5 business days for approval, funding in 5 days
What are Online Mortgage Lenders?
A relatively new fix and flip loan option that real estate investors and property flippers are turning to are online mortgage lenders. While online mortgage lenders haven’t yet acquired a lot of market share that may change in the near future. Online mortgage lenders are direct lenders that have leveraged technology to be able to make quick, accurate credit decisions with completely online applications.
Most online mortgage lenders, including Level 4 Funding can lend nationwide and have developed special products for real estate investors who need to obtain funding quickly and don’t need long-term loan. They can often have applicant prequalified in minutes and funded within 15 days.
Online Mortgage Lenders Qualification Requirements
Online mortgage lenders are generally available to those real estate investors who have profitably flipped at least one house.
· Credit score 650+ (check yours for free here)
· No recent bankruptcies, foreclosures, or tax liens
· Debt to income ratio under 50%
Online Mortgage Lenders Loan Terms, Interest Rates, & Fees
Online mortgage lenders loan rates span from approximately 7-12%, and the loans are typically for 12-month terms. With Level 4 Funding, the loans are fixed rate, interest only loans and there is no prepayment penalty, so you can save big money if you flip the property quickly. In most cases there is also an origination fee. With Level 4 Funding this fee will not exceed 2.5%. The
Online Mortgage Lenders Financing Limits
With Level 4 Funding you can get financing for up to 90% LTV or 75% ARV. The remaining balance of the purchase price and renovations will need to be funded out of pocket. Many investors look for business credit cards with good rewards programs to cover renovation expenses.
Where to Find Online Mortgage Lenders
Level 4 Funding offers online mortgage loans in for fix and flip investors in Arizona, California, Texas. Other lenders in this space are RealtyShares and Realty Mogul which are crowdfunding sites for real estate investors.
Option 2: Best for New Flippers: Hard Money and Private Money Loans
Hard Money and Private Money Loans Summary
Amount of financing available Typically up to 85% of After Repair Value
Minimum qualification criteria 620+ credit score, Debt-to-Income Ratio under 35%, and no recent foreclosures or bankruptcies
Paperwork you have to submit Contract of sale, property appraisal, past settlement sheets, repair estimate, recent tax returns, recent bank statements
Interest rates 8-18%
Fees 1-5% of the sale price of the home is paid at closing
Time to get approved 2-3 weeks
What Are Hard Money and Private Money Loans?
Hard money or private money lending is the principal form of financing for new house flippers. A hard money lender is a small group of private lenders who loan money to real estate investors and house flippers. They are generally costlier than bank financing but are often the only option for new house flippers or those with lower credit scores. They also might be the ideal lender if you’re buying a foreclosed home, especially if repairs are needed. A private money lender is similar, but is usually just a single investor who funds smaller projects at slightly lower interest rates.
Hard money and private money loans are ideal for novice home flippers, says Merrill, because these lenders care more about the property you’re flipping and its potential value than about the borrower’s experience or financial qualifications.
Hard Money Qualification Requirements
In general, hard money and private money loans are easier to qualify for than crowdfunding and bank financing. While requirements will vary from lender to lender, here is a good baseline:
· Credit score 620+ (check your score for free here)
· Debt-to-income ratio under 35%
· No recent bankruptcies, foreclosures, or tax liens
· No prior completed project required (but related experience preferred)
Individual private money lenders will have their own qualification requirements and credit score cutoffs. They may have less stringent guidelines than a larger hard money lender.
Hard Money Loan Terms, Interest Rates, & Fees
Hard money and private money loans are usually 1-12 month loans. The reason why the term is so short is because the process of buying a house, renovating it, and selling it typically takes less than 12 months. The loan is paid back with the proceeds from the sale of the home. Until the home is sold, you pay only monthly interest payments.
Interest rates for hard money loans are typically in the range of 8-16%. On top of that, you will have to pay 1-5% of the sale price of the home to the lender at closing. The longer you take the sell the home, the higher the fee you will have to pay. If you are working with an individual private financier, you may have some leverage to negotiate the rates and fees with him or her.
When you consider the fee along with the interest rates, it’s obvious that hard money loans don’t come cheap. However, Merrill points out that flippers can and should factor this increased cost into the specifics of the project — perhaps bid less for the home or increase the listing price when you sell the home to make up for the high cost of financing. Also keep in mind that you’re not paying the interest for very long, since you can usually flip a home in less than 1 year.
Hard Money Financing Limits
Most hard money lenders provide financing for up to 65% of the After Repair Value (ARV) of the house. In order for flipping to be a profitable endeavor for you, you need to make enough profit from the sale of the home after paying for renovations, interest and fees, and closing costs. Ideally, the loan should cover the full purchase price of the home, and you should have some funds left over for the renovation. First time flippers may receive even less than 65% ARV since they don’t have a track record yet. Essentially, the lender is making you assume more of the risk by asking you put up more of your own money.
Example: Suppose you want to buy a $250K home that requires $50K worth of renovations, and you estimate it will sell for $400K after the renovations. Most hard money lenders would loan you $260K at most (65% of the $400K ARV). You would have to put up the remaining $40K for renovations yourself. The $100K that you’re left with after selling the home ($400K sale price minus $250K purchase price minus $50K for renovations) should be enough to cover taxes, interest and fees on the hard money loan, closing costs, and any other expenses.
With only 65% ARV funded, the remaining balance of the purchase price and renovations will need to be funded out of pocket. Many investors look for business credit cards with good rewards programs to cover renovation expenses.
Where To Find Hard Money and Private Money Lenders
There are thousands of hard money and private money lenders. Often, the best way to find a private money lender is through local real estate meetups or through word-of-mouth exchanges with contractors and real estate agents and brokers. Hard money lenders can be found online.
We recommend South End Capital for hard money loans. To learn why, read our guide to hard money lenders.
Option 4: Best for Experienced Flippers: Bank Financing
Bank Financing Summary
- Amount of financing available Typically up to 65% of the purchase price of the home
- Minimum qualification criteria A registered business of flipping homes, at least 2 years of successful fix and flips, 700 + credit score, and a Debt Service Coverage Ratio over 1.25
- Paperwork you have to submit Repair estimate, purchase contract, property appraisal, past settlement sheets, recent tax returns, recent bank statements
- Interest rates 5-6%
- Time to get approved 1-3 months
Is Bank Financing Available for House Flippers?
Banks typically don’t offer fix and flip loans to people who are just starting out. However, once you have at least 2 years of experience in profitably flipping homes, bank financing is more readily available. The financing usually comes in the form of a line of credit which you can draw from as needed.
Bank financing is the cheapest source of capital, but it also takes the longest to secure. Expect to wait 1-3 months before securing bank financing. A bank won’t lend as much money as a hard money or private money lender so you need to have some capital from other sources before relying on bank financing.
Bank Financing Qualification Requirements
To qualify for bank financing for fix and flip projects, you would typically need:
· 2 years of profitable track record flipping houses
· Credit score 700+ (check your score here for free)
· Debt Service Coverage Ratio of 1.25+
· No recent bankruptcies, foreclosures, or tax liens
· Registered business
Note: Debt Service Coverage Ratio (DSCR) is your business’s annual net operating income divided by your total annual debt payments. For example, if you have $180,000 in annual net income and debt payments of $90,000, your DSCR is equal to 2.
Bank Financing Loan Terms, Interest Rates, & Fees
Bank lines of credit are the cheapest form of capital for flipping houses, with interest rates in the 5-6% range. There may also be small upfront fees and draw fees on a line of credit. The bank will tell you how much time you have to pay back your balances. In most cases, a minimum amount will be due each month (like a credit card).
Lines of credit are more flexible than a loan because you don’t have to pay interest on unused funds. With a hard money loan or private money loan, you will to pay interest on the entire loan amount even if you end up needing less.
Bank Financing Limits
The most common form of bank financing, says Than Merrill, is a secured line of credit to help you purchase the home. Once you find a home that you’re interested in buying, the bank may issue you a line of credit for up to 65% of its purchase price. This leaves you to put up the remaining 35% and to fund the renovation.
Some banks will also offer an unsecured business line of credit which can be used to finance the renovation. For example, before you even find a home that you’re interested in purchasing, you may be able to receive a $100,000 line of credit from a bank. You can then draw on this line as needed to buy supplies, pay your contractor, etc.
Planning to rent out the home after renovations? In this case, try to get a conventional mortgage. Or if you start out with a hard money loan, you can refinance to a conventional mortgage after the renovations are completed.
Where To Find Bank Financing
There are literally thousands of banks in the United States, and each of them offers different products. Merrill recommends that house flippers go to a smaller local bank because they are more likely than a national bank to support local real estate investment and community redevelopment efforts.
Bank of the West and Wells Fargo are two of the larger banks we spoke to which offer lines of credit for house flippers.
Additional Fix and Flip Resources
We covered the four financing options for those looking to fix and flip houses. But finding the appropriate financing for your fix and flip project is just one piece of the puzzle. Below are a few more resources to arm you with the knowledge and sources you’ll need.
Get An Edge: Learn from the Fix and Flip Pros
Ask anybody who invests in real estate or has flipped homes and they’ll agree: you will save yourself lots of time, money, and frustration by learning from the pros. Here are a few essential reads:
Find Opportunities: Where to Find Short Sales and Foreclosures
US Government Agencies
A number of government agencies (HUD, FDIC, IRS, US Marshals Service, etc) have properties for sale. Navigating the various sites can be a little tricky. You can access those listings for free here.
MLS.com is a free multiple listing service. You can search real estate listings (including foreclosures) and also scan their real estate news and Q&A section.
Find and bid on bank owned and foreclosed properties in your area. With an easy to use website, this is a great place to research markets and find properties.
Note: The laws concerning flipping houses vary from state to state and county to county. This means that the licenses, permits, and certifications needed to flip properties can differ depending on the market. For example, some states require house flipping businesses to have general contractor licenses or, if the home is being sold through a subsidiary, require a real estate license.
Join the conversation: If there are resources you’ve found valuable, let us know in the Fit Small Business forum.
The Bottom Line
House flipping can be a rewarding business to enter, and there are a variety of financing options. Most first timers have to rely on private or hard money loans, which can be expensive. Fortunately, as you find your way around the business, less expensive bank financing becomes more of an option. Online mortgage lenders are also available to professional flippers who need money fast.
There are other resources to finance fix n’ flips that we didn’t discuss in this article. For example, you can use a credit card to finance renovations or take out a personal loan. As a house flipper, you sometimes have to be creative and combine financing from multiple sources to get the capital you need to be successful.
If you are looking for a 12-month mortgage with a fixed interest rate of between average 7-12%, interest only payments, and no prepayments penalties, consider Level 4 Funding Private Hard Money Lender. You can get prequalified in minutes and see your exact rates. Plus, get funded in as little as 15 days.
Dennis Dahlberg Broker/RI/CEO/MLO
Level 4 Funding LLC Private Hard Money Lender
Arizona Tel: (623) 582-4444
Texas Tel: (512) 516-1177
Dennis@level4funding.com NMLS 1057378 | AZMB 0923961 | MLO 1057378
22601 N 19th Ave Suite 112 | Phoenix | AZ | 85027
111 Congress Ave |Austin | Texas | 78701
About the Author: Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 42 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.