Financing for Flipping Houses: How Fix and Flip Loans Work

Are you interested in learning about options for financing for flipping houses? We’ve got all of your questions answered here.

Being a part of the real estate market is an exciting, lucrative endeavor. That’s why more than one-third of real estate investors are planning to buy more.

If you’re already a part of this market, you understand the challenges and rewards. And if you’re a novice—welcome to a thriving industry of over 28 million people.

Real estate investors spend upwards of $9.2 billion a year to repair housing. Once these properties get improved and sold, that investor is looking at an impressive passive income.

But, how do they secure financing for flipping houses, exactly? Sure, you want to get involved in the fix-and-flip business—but where does the initial money come from?

Many investors utilize the help of private lenders.

If you’re still unsure of how to begin, keep reading. We’ll explain how fix and flip loans work, as well as how you can make a name for yourself as a successful investor.

What Are Fix and Flip Loans?

The fix and flip tactic of generating revenue is an American classic. The process entails purchasing a home and reselling it for a profit—simple enough, right? This method of gaining income is one that contributes to a $56 billion national market.

Say you want to get your hands on this lucrative business, but you don’t have finances at the ready for down payments or “fixing” the property for selling. Does that mean you’re not destined to fix and flip?

That’s where fix and flip loans come in.

These loans allow you the means to purchase property and fix it up—then sell it for a higher dollar amount, paying back your loan, and opening up the opportunity for more purchases. This circle of investing in assets generates income that can continue to be expanded.

Loans are offered from two sources—the bank, and private lenders. Each has its own advantages, but for this piece, we’ll be discussing private lenders.

Keep reading to see the benefits of working with a private lender, as well as your loan options.

How to Receive Financing for Flipping Houses: You’ve Got Options

There are various types of fix and flip loans to choose from, giving you several options for your needs. Those types are

Hard money loan
Bridge loan
Cash-out refinance loan
Home equity line of credit
Investment property line of credit

Each offers different benefits for different kinds of investors. We’ll break them down, so you know what to choose.

Hard Money Loan

To receive a hard money loan, private lenders will have to approve you. One thing private lenders look for is a successful track record—proof you can affordably complete a project and pay off your loan. That’s why this is an ideal loan for professional investors.

Hard money loans require you to put up collateral. This shows you have something valuable to offer up as proof you’ll pay off your loan. Many people use another real estate property as collateral, but you can talk to your lender about other options.

As long as the loan isn’t higher than the value of the collateral, the lender will issue you loan money after an approval process. You’ll then have a repayment schedule worked out with the lender. If you can’t pay your loan amount back within a specified timeframe, the lender could keep your collateral.

That’s why this loan is also a good option for new investors trying to build a business. The collateral is safer than traditional loan options—you’ll only lose what you’re willing to lose, what you offer as collateral. That means if your fix and flip property doesn’t sell, your personal assets won’t have to take the hit.

This type of fix and flip loan is also suitable for those who can’t get reasonable loan options from the bank.

Bridge Loan

This type of loan is ideal for an investor that’s currently selling a home and trying to finance a new one. A lender will provide a bridge loan to help ‘bridge the gap’ between properties. This loan offers you the finances for your new property until your current one sells.

Your current property secures this temporary loan. It can almost be considered as a down payment on your new home.

This loan is considered short-term because the borrowers usually pay the loan back once their old property sells. This typically takes a few weeks to a few months at most. This buffer is exactly what some investors need to move from one home to the next in a financially secure way.

Cash-Out Refinance Loan, Home Equity Line of Credit (HELOC), and Investment Property Line of Credit (LOC)

A cash-out refinance loan is one that requires you to own a property already. You’ll need about 30-40% equity to be a candidate. Beginning investors are not candidates for this loan type.

HELOC is very similar to a cash-out refinance but requires the borrower to own their primary residence. Must also have about 30-40% equity established.

LOC is a line of credit on investment properties.

While these loans are suitable options, they’re only available to already-established real estate owners. Beginning real estate investors likely won’t own property already. The best type of fix and flip loans for novice investors are hard money loans or bridge loans.

Know What to Expect: A Look at the Process

The process for applying for one of these loans through a private lender is relatively straightforward. The steps are clearly outlined in the following:

Apply
Receive and review a quote and loan proposal
Go through a pre-approval
The underwriting process
Funding granted

First, you’ll have to apply for a loan through a lender. Orchard Funding offers fix and flip loan amounts up to 90% of the purchase or 90% of the rehab cost for the purchase and renovation.

Next, you’ll receive a detailed quote and loan proposal to review. This should outline terms, payment, and other loan details. If the proposal is acceptable for both parties, you’ll move onto the pre-approval stage.

To issue a loan pre-approval, a lender will have you provide a bank statement, undergo a credit check, and explain your experience and project. What are the preliminary details of your potential property? What are your budget and timeframe?

Once the appraisal is in, the underwriting process begins. This means property insurance has been verified, and the title commitment is ready to go. This process is usually quick—24 hours or less.

Then, the lender closes the loan, and you receive the funds for your project! Many lenders make a payment plan that spans five years or less.

Why Choose a Private Lender

You want a loan, but you don’t want to deal with the bank—understandable. That’s where non-banking entities like private lenders come into play. Private lenders are individuals who lend money to people like you to buy real estate.

First, private lenders are concerned with the scope of your project.

They’ll ask you about your experience, your business plan, and your goals for the property. These goals include things like timeline, budget, and selling price. This can be an excellent opportunity for an investor to conduct a thorough, well-thought-out business plan to achieve funding.

Next, the procedure is exponentially streamlined. We already covered the process for you above—five straightforward steps to achieving a loan. This faster transaction time will get you fixing and flipping in no time, instead of wasting precious days on tedious paperwork.

Private lenders also have the option to offer flexible payment terms. With banks, you have (sometimes) hidden fees and strict terms that allow for no unexpected delays. With private lenders, you’ll develop a transparent relationship that is flexible and understanding.

And lastly, we’ve already briefly touched on this final significant benefit—the option to use collateral.

If for some reason, you can’t pay the bank back for your loan, they can come after any of your assets, including your income. This leaves people in desperate situations that wreck their financial standing. With private lenders, the option to use collateral saves individuals from losing it all because of one lousy purchase.

When you put up collateral, private lenders can seize it to re-coup their loan amount if needed—and that’s all. They won’t come after your other assets or income.

Fix, Flip, and Finance: The Three Fs of Real Estate Investors

This guide should explain the basics of fix and flip loans. They’re a great way to achieve your goals as a successful real estate investor. Unless you’re coming from a large inheritance, the odds are good you’ll need some financing for flipping houses.

That’s where we come in.

We at Orchard Funding are private lenders that provide the loans needed to make you a professional real estate investor. We’re located in Arizona, California, and Colorado.