Are you curious about house flipping but worried you won’t have the money to start a project? Have you looked into loans but it’s overwhelming to see all the financial jargon? Many other first-time house flippers feel the same way!
Paying with cash is always the best way to purchase a property, as you’ll avoid fees and not risk other people’s money. If that isn’t possible for you, it shouldn’t stop your plans! You’ll just need to understand the best house-flipping loans to get started.
Most home flippers require a loan so there are many options out there. House flipping loans are unique because of the higher risk and shorter term, so you’ll want to understand your options before signing onto one that you may regret later.
Loans 101
It’s easy to feel intimidated by the idea of taking out a loan. Millions of people do it every year to help build their wealth, so it shouldn’t worry you. It’s essential to make the right choices on which loan you get and who you borrow from.
How It Works
Loans are a form of borrowing money at a cost to pay back later. It involves a contract with the lender that benefits them in some way, typically financially by charging interest on the loan.
For house flipping, you may need a loan to make a down payment. You’ll reach out to reliable lenders to see what they can offer you. Once you find one, you sign a contract and have access to that money. Each contract and lender differ in the conditions.
Who Provides the Loan
There are different places you can find lenders. While many think of banks as the only option, there are other options to look into. For house flipping, banks will often not sign a loan with you so you’ll need to look elsewhere.
A few places where you can find reliable lenders are:
- Banks
- Credit unions
- Private lenders
- Hard money lenders
- Fin-tech services
- Crowdfunding sites
Explore The Options for House Flipping Loans
Traditional property loans don’t always work for house flipping because it’s a short-term loan with significant risk. For this reason, you may need to consider other unique loans for flipping houses. You’ll want to understand them each before committing, just to be certain you’re picking the right one.
1. Conventional Loan
A conventional loan comes from a bank or large mortgage lender. It is a personal loan dependent on your financial history that gives you access to the chunk of cash that you need.
It will require you to have a high credit score or solid income for them to qualify you. Even with these two things, they may deny your request because of the high risk associated with flipping. If you’re planning to live in the home you are renovating, you have a higher chance of acceptance.
These lenders will usually require the property to be in decent condition as well, so don’t expect to buy a full fixer-upper with this kind of loan.
The advantage is that the interest rates are lower, but the approval process may be too slow if you’re ready to purchase the property and the seller needs an agreement.
2. Hard Money Lender Loan
Hard money lenders get plenty of business from house flippers. A hard money loan is when you put the property itself up as collateral with the lender giving the loan. They provide you with cash so that you can purchase and flip it.
These private lenders are most concerned with the quality of the property and the likelihood of the profit. They will require extensive information about the property before providing you with a contract, such as the loan-to-value (LTV) ratio and after repair value (ARV).
Expect hard money loans to have higher interest rates and monthly repayment plans than other loan types. They may average around 7-15% interest rate for a 1-3 year loan term.
Hard money loans are the most popular type of loan for house flippers for many reasons:
- Quick acceptance: The loans are typically approved within days or weeks.
- Plan for funds: There is often a slow release of the funds at benchmarks in the project. This plan for rehab costs will be agreed upon in the initial contract.
- Relationship-built: Private lenders for hard money loans depend on relationships and trust. You can build a strong one where you both benefit if communication remains clear.
3. Home Equity Loans
A home equity loan is where a lender will give you money by leveraging another property of yours. If you’re willing to put up your other home as equity, then this can be a great option to access funds for house flipping.
The loan amount will be limited based on how much mortgage is left on the initial property. These are either fixed-rate home loans that give one lump sum, or home equity lines of credit (HELOCs) that give revolving lines of credit.
These loans are great if you have an exact amount in mind to borrow. It may be difficult to get enough to purchase an entirely different property and cover the renovation costs, but it is possible for some homeowners.
4. Personal Loan
You may have someone willing to provide you with money. You must be careful to draw up a contract where the agreement is very clear. The deal most often relies on the end profit being split with the loan provider.
These types of loans are open, less regulated, and fully dependent on the contract agreed upon. It may be a good idea to get a lawyer involved to ensure the contract is fair for you and the lender.
You’ll need a strong network and business plan to find someone willing to back you for your project.
Steps To Get House Flipping Loans
It’s an easy but careful process to get a loan. Real estate investors need strong relationships with lenders and a good reputation to build their portfolios. Make sure you are selective and informed at this stage.
Step 1: Research the Type of Loan and Lender You Need
To get a loan, you’ll want to narrow down the lenders that interest you. To find possible lenders, decide which type of loan we mentioned above would work best for you.
To find private lenders, look online. Many lenders will clearly state what they require from you and what they will offer. There may be local, brick-and-mortar hard money lenders, as well, that you can find. Reaching out to local real estate associations may help you find them.
Look at popular lender LendingHome as an example. They require bank statements to prove you can cover your closing costs and down payment but will cover 100% of the renovating costs and 90% of the home’s purchasing price.
Step 2: Reach Out to Lenders To Qualify
Different lenders will provide a variety of loan terms. It’ll be important to familiarize yourself with the conditions so you know exactly what you’ll need to do to avoid issues with your lender.
Map out your credit scores, previous flipping projects, cash available, property documentation, and priorities for a loan before contacting any lenders. They’ll want all of this information to start.
Some terms you may see and want to familiarize yourself with are:
- Interest rates: Amount added to the loan after a certain amount of time goes by.
- Closing costs: The costs to finish the deal and sell the house.
- Origination fees: One-time charge for the loan at the beginning of the process.
Step 3: Accept Loan & Follow Terms
Once you have found a lender that you trust, sign the deal. You’ll either get your money upfront or over time during your project. You can begin your house-flipping journey!
With most house flipping projects, the process should be relatively quick. The faster you get your flip done, the better for the loan interest rates.
Maintain good relationships with your lender, giving them updates to feel secure in their loan. If you continue to flip homes, these relationships will be very valuable, helping you gain trust and get access to larger loans.
Weighing Up Loans
People are afraid of loans. While they can be dangerous if handled poorly, you don’t need to be afraid of taking out a loan if you make smart decisions. Just make sure it’s the right thing for you to do before signing a contract.
Pros of House Flipping Loans
The benefits of loans are vast. They’re essential for many people to build wealth. Take these things into consideration when choosing a loan:
- Less upfront cash required: You can hold onto more of your cash if needed by taking out a loan. This helps maintain your liquid assets.
- Diverse financing options: There will typically be a good plan for you regardless of your situation. If you need a longer time to pay a loan, there will be trade-offs with the lender that can allow that as an option.
- Afford more: You’ll be able to purchase larger assets or properties with the loan, which leaves you in a position to make more money.
Cons of House Flipping Loans
It will be important to be realistic when taking out a loan and think about all aspects of the responsibility, including:
- Risk of collateral: You might be required to put down equity on your existing assets. This does put them at risk in case anything goes wrong.
- Interest rates: Loans often have high fees associated with them, so you’ll end up spending money to borrow money. Make sure it’s worth the cost and reasonable for your finances to afford.
- Recurring payments: You’ll be required to make consistent payments. If you can’t keep up, there will be fees that will cost you more. You need to be confident you can pay it.
- Credit impact: It will impact your credit if you don’t make your payments. This will prevent you from getting future loans and credit cards.
Wrapping up
Getting loans for flipping houses is an essential piece of the process for most house flippers. You’ll be able to afford larger projects with greater potential for profit by taking out loans. It doesn’t need to be scary, you just need to follow the right steps.
Most house flippers will get a hard money loan, but your situation may call for something different. Hopefully, this article clarifies the best route for financing your project.
If you enjoyed this article, please comment with your thoughts or share with your friends who want to try house flipping!
