How to Get a Loan to Flip a House In 3 Easy Steps

Financing a house flip might seem like the most challenging thing on the planet. “Who would want to lend me money to buy and renovate a house?!” you might ask. Don’t worry; we’ll tell you how to get it done. 

Here, you’ll find the most important information on how to get a loan to flip a house. Buckle up because you’re about to rock that real estate market! 

How to Get a loan to Flip a House: Lenders Offering Loans

Most house-flipping deals are made with loans, mortgages, or any other type of credit. Here are the three biggest lenders where you can get house-flipping loans for any type of property you want to renovate: 

1. Banks and Credit Unions

These entities are the best places to get a traditional mortgage, a bank loan, a home equity loan, or an investment loan. But what’s the catch? 

Getting a loan from a traditional bank or credit union is practically impossible without a high credit history and a huge down payment. That’s why, if you are a beginner with no starting capital, it is better to get financing from other places. 

However, suppose it’s not your first fix and flip. In that case, you can borrow money from a big financial institution and double your profits by buying a bigger property or opening a low-interest-rate home equity line with them. 

2. Hard Money Lenders

If it is your first fix and flip, you can go for a hard money lender. A hard money loan is a type of investment commitment where an investment group lends cash for short-term real-estate asset acquisition and typically uses the property as collateral.  

This means that, even if you don’t renovate the house and sell it for a profit, you can still cover the entire loan amount by simply handing them the property. 

However, with this type of loan, you’ll have a couple of issues going on. First, you’ll be on a very tight budget to renovate the property. Second, you won’t be able to increase the loan amount over time. 

3. Peer to Peer (P2P) Lenders

Friends, family, or acquaintances who believe in your project can invest in it, too. This is one of the most commonly used methods for getting your first flip loan. Private lenders, such as banks or big financial institutions, won’t take the risk to invest in a newbie. The same is true with hard money lenders, who will probably make you pay interest rates you have never seen before. 

So if your family can lend you some money as a starter, you should use it without a shadow of a doubt. 

Types of Loans for House Flipping

Here are the best types of fix and flip loans you can use. 

1. Hard Money Loans

The best part about hard money loans is the turnaround time. In comparison to a traditional mortgage, which can take up to 60 days to be approved, a hard money loan can be approved in 14 days. This advantage can play a crucial role when it comes to closing on real estate purchases. 

Also, consider that hard money lenders are far less likely to look at your credit score when giving you a loan. They might look at your history but never at the score itself.  

However, you should be aware that interest rates and origination fees will likely be far more costly than traditional mortgages. 

2. Home Equity Loans

Do you have a two-million-dollar house? You can use it to finance your next house-flipping project.

House equity loans let you tap into your primary residence equity, using it as collateral to borrow the liquidity you need to complete a flip project. 

On top of that, home equity loans have lower interest rates than hard money loans. If you have a good credit score, you should expect interest rates as low as 3% to 5%. 

Although this proposal might seem attractive initially, remember that it’s your primary residence you used as collateral. It’s best to use home equity loans only when you’re 100% sure the project will be profitable. 

3. Personal Loan

If you have a credit score of 700 or above, you can use a personal loan to finance your project. According to the Federal Reserve, you can get up to $100,000 with an average interest rate of ~11.46%. 

Of course, you won’t be able to buy, renovate, and sell an entire house with only $100,000 in your bank account, but this type of loan can help you finish a renovation project in case your big short-term loan isn’t enough. 

4. Crowdfunding 

Crowdfunding is a cheat code when it comes to raising money. If you can get the attention of enough small investors, you can finance literally any project out there. The most successful project on Kickstarter has raised more than $40 million. Just think about how much money you can raise!

Keep in mind that the chances of getting rejected by the market are enormous. Also, you should understand that the more money you raise, the smaller your profit margin will be. Hence, always consider these arrangements when creating the business plan.

5. Cash Out Refinance

Compared to the home equity loan, where you’re borrowing money using your primary residence, with cash-out refinance, you can use any other property you have. You can even use another property you’re flipping. 

The biggest downside here is that for the period you’re using that property as collateral for a loan, you won’t be able to sell it. 

What Are the Costs of Flipping a House?

The worst case scenario in the house flipping business is to under-budget a deal. That’s why you need to know exactly what the costs will be and add 10% on top of unexpected fees or costs.

Here are the biggest money-grabbers in a house-flipping deal:

1. Purchase Price

Of course, the biggest chunk of your budget will go to finance the purchase of the property itself. At this point, you might want to understand what is a healthy profit margin for a real-estate flipper. The most important formula you must remember is the ARV or the after-repair price. 

The formula goes like this:

ARV = MAO (maximum allowed offer) + fixed costs + rehab costs + desired profit

The MAO is the maximum amount of money you can spend buying a property. As a rule of thumb, your 

MAO shouldn’t exceed 70% of the ARV, minus repairs.

2. Closing Costs

To close on a property, you have to pay some hefty fees. Attorney fees, title searches, lender fees are called closing costs. House flippers pay about 6% of the home’s purchase price just to seal the deal. You should consider that when you plan out your budget. 

3. Renovation Costs

The second biggest expense you must go through to flip a house is the renovation. Your costs will vary depending on the severity of the renovations, the size, and the local price of labor and materials.

If you don’t have much experience with real estate, you won’t be able to see all the renovations you’ll need to do. That’s why you should work with an experienced real estate agent and inspector who can walk you through all the renovations a property might need to look decent. 

Usually, the cost to renovate a property can range anywhere from $10 to $80 per square foot. That’s why you must take into consideration all the small details you’ll need to repair.

4. Carrying or Holding Costs

Imagine you’ve already renovated the property, and you now have to sell it. Did you really think you’d sell it in a week? No, you’ll probably have to maintain the property in good condition for at least a month 

before selling it to someone. That’s why you should have a budget for all the carrying costs: 

• Interest: If you’re working with a hard money lender, prepare 8% to 15% in interest payments monthly. 
• Taxes: Property taxes, short-term capital gains taxes, regional and federal taxes all need to be included in the budget. That is, if you don’t want your property seized by the IRS. 
• Insurance: In some states, your property must have insurance before you can sell it. 
• Utilities: Even if you don’t use the house, you’ll need to pay for trash removal, electricity, and water. You can reach out to local utility providers and find out the cost to include it in your spreadsheet. 

5. Selling Costs

If you don’t plan on selling the house by yourself, you’ll have to pay a real estate agent or agency to help you with the process. Usually, they take 6% of the total sale price as a fee for their services. 

That said, you can try to sell your first few properties by yourself. It might take a little longer, but it will also give you the needed experience to complete important deals and raise your profit margin, giving you more capital to operate bigger flips. 

How to Get a Loan to Flip a House

Here are the three most important steps to get a house flipping loan:

1. Prepare Some Cash

If you are getting a loan from a traditional bank or a credit union, you’ll need to make a down payment. Usually, you’ll need about 10% of the total house price to get a traditional mortgage and about 15% to get an investment loan from a bank. 

For those with no cash and a good credit score, you can take a personal loan to cover the down payment for the bigger loan. This is a lot more risky than when you have the cash on you, that’s why you need to use this method only if you’re 100% sure you found a highly profitable gem. 

2. Calculate Everything

House flipping is a business, and the most important part of every business is the behind-the-scenes game. 

When it comes to house flipping, you also have a lot of math to do. Before buying the house, you should know approximately how much you’ll spend on materials, labor, and taxes. Make a spreadsheet with all the numbers and calculate the estimated profit you’ll get. 

This will make you feel better about the deal and help you get better terms to finance your house. The bank or the private lender will see that you have a business plan and will lend you money at a better interest rate. That’s just how the business works.

3. Find the Lender

After you have completed your spreadsheet, you can start looking for lenders. Depending on your financial situation, you’ll get to choose the loan type you want and the lender you can afford. 

If you find a perfect house with minor renovations to do, you should probably go for a hard money lender. They will give you the cash before your competitors notice. If you want to go for a long-run project, a mortgage or a loan from a bank will do the trick. 

Wrapping Up

Finding the right loan terms to flip a house might seem scary for a novice house flipper. However, if you manage to bypass that fear of losing your investment, you can turn that loan into an even bigger pile of hard cash. 

You just have to follow these house flipping tips to secure your capital, start flipping houses, and increase your monthly income! 

Let us know if your first flip was profitable in the comments below! Also, if you liked the article, why not share it with your friends?