Fix and Flip Loans: What They Are and How They Work

IN THIS GUIDE

Fix and flips loans are different types of loans used to repair or renovate and resell homes. Flipping can be a very profitable business, but it usually requires investors to move quickly in order to close on properties when they find a good deal. Investors must also have the financial resources to complete rehab projects quickly to minimize holding costs.

What Is a Fix and Flip Loan?

Fix and flip loans aren’t one specific loan product, but rather a small subset of loan products that are particularly beneficial for financing repairs and renovations of homes prior to resale. For that reason, fix and flip loans come in several shapes and sizes—ranging from lines of credit to federally-guaranteed rehab loans.

Some of these financing options are term loans, while others are revolving. All fix and flip loans, however, are secured—typically by the property being rehabbed. Many lenders also require additional collateral that is separate from the underlying property. In addition to being secured, these loans are almost always personally guaranteed by the borrower.

How Does a Fix and Flip Loan Work?

Investors use fix and flip loans to acquire a property they intend to renovate and resell for a profit. The purchaser may pay cash for the property, or finance it like a traditional home purchase, though fix and flips are usually non-owner-occupied. Then, the investor accesses financing—which are often secured by other assets, such as their personal residence—to cover the cost of renovating and holding the property until it’s sold for a profit.

Fix and flip projects are often viewed by lenders as riskier than traditional homes and mortgages because they are non-owner-occupied and purchased for a business purpose. Further, these properties often have a lower value as collateral, and the lender knows the value of the collateral will decline temporarily as renovations begin.

Origination fees for these loans generally range from 1.5% to 5% of the total loan amount but may be higher depending on the scope of the project. Interest rates range from 3% to 12% or more depending on the borrower’s credit score and other factors.

Types of Fix and Flip Loans

Several forms of financing can be used as a fix and flip loan—each with its own characteristics and advantages. These are some of the most common types of fix and flip loans:

Hard Money Loans

Hard money loans are a type of nontraditional financing that is secured by valuable collateral, like real estate. For that reason, these loans are more accessible to borrowers with poor credit. Hard money loans also can be used for the rehabilitation of properties that are already mortgaged, which makes them perfect for fix and flip real estate investors who need cash for renovations.

Key Takeaway: One of the biggest advantages of hard money loans is that borrowers can often access the cash faster than with more traditional loans—sometimes in a matter of days. However, this type of financing can be expensive, with interest rates much higher than those available with more conventional financing.

Conventional Loans

Conventional loans are financial products obtained through a bank or credit union. These loans require a full underwriting process, and it can take around 30 days to receive funds. This traditional form of financing also requires extensive collateral, which includes but may not be limited to the property being renovated.

That said, interest rates are generally lower than for other types of fix and flip loans and may range from just 3% to 7%. Conventional loans may also be more difficult to qualify for
but can be ideal for creditworthy borrowers and real estate investors with established banking relationships.

Construction Loans

Construction loans begin like a line of credit, with money drawn gradually as it’s spent on the project. Interest-only accrues on the portion of the loan the borrower accesses. At the end of the draw period—usually between one and two years—the construction loan is converted to long-term, fixed-rate financing.

Interest rates range from 4% to 6% during the draw period and 3% to 5% thereafter. This type of financing is favored by developers because interest is prorated during the draw period and allows for flexible loan conversion when multiple projects are underway simultaneously.

203(k) Loans

A 203(k) loan is a type of residential rehab loan that’s federally guaranteed by the Federal Housing Administration (FHA). FHA 203(k) loan funds can be used to pay for materials and labor associated with the purchase and rehabilitation of fixer-uppers. Loans can also be used to refinance properties as a way to fund renovation costs.

Keep in mind, however, that 203(k) loans are reserved for the rehabilitation of owner-occupied, primary residences. So, the program isn’t a good option for real estate investors who exclusively purchase properties they don’t plan to inhabit

HELOCs

Home equity lines of credit, or HELOCs, are a type of secondary mortgage that lets real estate flippers borrow against a property they already own. To qualify for a HELOC, the borrower must have substantial equity in the property being leveraged—usually at least 15% to 20%. Borrowers can typically access up to 90% of their total equity in the home, so available financing amounts vary. That said, HELOCs are revolving, meaning active flippers can access the funds on an as-needed basis, make monthly payments, and access the money again for the next project.

Even if you can’t finance a full fix and flip with a HELOC, it’s probably your best bet for fixing and flipping a house with no money down. Still, underwriting on a HELOC can be time-consuming. Not only is the application process more rigorous than for other types of financing, obtaining a HELOC usually requires an appraisal of the property you’re borrowing against.

Where to Get a Fix and Flip Loan

Banks and Credit Unions

A bank or credit union can be the easiest source of fix and flip financing for borrowers with an existing relationship with a local lender. To secure funding, apply through your local branch, usually working directly with an individual loan officer who coordinates your application. Keep in mind, however, that it can take 30 days or longer to complete the necessary paperwork and go through underwriting—especially if the lender requests additional documentation.

Online Lenders

In addition to local banks and credit unions, there are specialty lenders and brokers who can provide funding for fix and flips. Many of these lenders offer more lenient credit standards and faster funding times than banks and credit unions. The cost of borrowing online can be higher than for traditional lenders, but there are some lending platforms that help borrowers shop around for the best rate.

5 Steps to Get a Fix and Flip Loan

The process of applying for a fix and flip loan varies by lender and loan type. However, there are a few general guidelines borrowers should follow with every lender. Here are the five steps to get a fix and flip loan:

  1. Review your credit report. As a house flipper, lenders will likely look at your personal credit score when evaluating your loan application. Ideally, you should have a FICO score of at least 620 to qualify for a fix and flip loan, but this requirement may be more lenient for some lenders and loan types. If you have an established real estate flipping business, lenders may also look at your business credit score.
  2. Save money for a downpayment. A down payment isn’t always required for a loan, but it can make you more appealing to lenders. Where possible, save between 20% and 25% of the purchase price before choosing a property and applying for a loan.
  3. Compare lenders. When searching for a loan, compare lenders based on available loan amounts, terms, and annual percentage rates (APRs). If you have a low credit score or limited experience flipping houses, also look for lenders with less rigorous lending standards.
  4. Gather necessary documentation. Lenders have varying application and qualification requirements. However, most financial institutions require applicants to provide copies of their personal and business tax returns going back at least two years, and business financial records for at least three years. Also take time to compile a business plan, information regarding other outstanding business debts, and documentation of your previous success with fixing and flipping homes.
  5.  Submit a formal application. Once your documentation is in order, submit a loan application online, in person, or over the phone. The actual process of completing and submitting an application is very lender-specific, so contact a lender representative to learn more about the next steps.

 

Key Takeaway: Much like the application process, the amount of time it takes to receive loan funds varies by institution. However, some top lenders promise funding in as little as one business day after approval and verification.

Advantages of Fix and Flip Loans

  • Approval times are typically faster than for traditional mortgages and bank loans
  • Fewer limitations on the type—and condition—of properties that can be financed
  • May not require a down payment
  • Some fix and flip loans do not require an appraisal of the financed property
  • Private fix and flip lenders don’t usually charge prepayment penalties

Disadvantages of Fix and Flip Loans

  • Often more difficult to obtain than traditional mortgages
  • May not be available to inexperienced house flippers
  • Some loans, like HELOCs, require an appraisal of the property securing the loan
  • Certain loan types only available for owner-occupied properties

Bottom Line

Fix and flip loans are a great way to finance the development or rehabilitation of residential properties. There are many different types of loans that can be used to finance rehabs and renovations, and each has its own advantages and drawbacks. But, if you need to move fast to finance a deal or need flexible financing to rehab a property to sell at a profit, these loans can be a great option.
If you’re looking for a loan to finance your next fix and flip, we’d love to help. We offer several types of loans that can help finance rehabilitation or renovation of property. Complete the contact form below and one of our representatives will be in touch to see how we can help.

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