The Ultimate Guide to Fix and Flip Loans
Fix and flip loans can be incredibly useful when it comes to getting the most out of your investment. Here is everything you need to know about these loans.
Just last year, gross returns for flipping houses reached their highest level in 20 years, according to a report by ATTOM Data Solutions. If you’re looking to get your foot in with what has the potential to be an extremely profitable business, you need to know everything there is to know about fix and flip loans.
Here you’ll find a complete guide to the best fix and flip loans and how to apply for one.
What Are Fix and Flip Loans?
You can make a lot of profit over time by flipping houses. However, the start-up costs can be steep – buying a house and paying for the repairs doesn’t come cheap. A solution was needed and the fix and flip loan was created to fill that need.
Fix and flip loans are a type of real estate loan. They are short-term loans that enable the investor to purchase and renovate a house so that it can be sold at a profit, generally within 12-18 months. The loan is used to purchase the property, finance the renovations, and cover any other expenses that come with owning the property.
How Is It Different From a Home Loan?
Fix and flip loans differ from home loans in several ways:
- Flix and flip loans come with a duration of 6-18 months
- Interest rates are higher
- The house itself is the collateral, instead of private property or credit
Advantages of Fix and Flip Loans
If you didn’t know this already, real estate is the best performing investment in modern history. This is because it comes with advantages that no other form of investment has. It’s now more than possible for anyone, not just the already rich, to build real wealth and receive all the benefits of real estate investment.
If you’re interested in flipping a house, the benefits of taking out a fix and flip loan can’t be overstated.
When you take a traditional home loan, you have to put up your personal credit and property as collateral. A fix and flip loan’s collateral is the property for which the loan was given. This is a safety net for the buyer, as you don’t have to worry about losing your home or other private property if the worst should happen.
Taking out a traditional home loan can take up to a month for processing and delivery. By contrast, fix and flip loans are processed a lot faster, often within a week or 10 business days at the most.
Fix and flip loans don’t have to abide by the same strict requirements, processes, and structures that traditional banking institutions do. Even if you don’t qualify for a traditional loan, you can probably still qualify for a fix and flip loan.
Cons of Fix & Flip Loans
There really is only one disadvantage to taking a fix and flip loan. These loans come with high interest rates because they are designed to be short-span loans. If the renovation takes longer than planned, or if the completed property is on the market too long, the high interest rate can become a heavy burden on the borrower.
How Much Profit Can You Make?
It can take some time to build up a solid house-flipping business, but it can also be extremely rewarding. An experienced house flipper stands to make an average of $25,000, and often more, per house. If you’re fixing and flipping 10 houses a year, that’s a profit of $250,000.
Tips for Getting a Fix and Flip Loan
Finding a good lender for your fix and flip loan is vital. Here are some things to take into consideration.
Experience and Reliability
How long has the lender been in the market? Are they reliable? Has anyone you know worked with them before? A good lender may also be able to recommend good contractors for you to work with. Reading online reviews is often a good way to get some honest insight.
Construction draws are portions of money that are given to the house flipper for specific construction projects. Some lenders may only release these funds when the work is in process or after it’s completed. This is called a construction holdback. Always make sure you know upfront how quickly a particular lender will release these funds to you.
Know All the Costs
There are many different costs that go into fixing a house. Apart from purchase and renovation costs, others include:
- Carrying costs
- Selling costs
- Project cushion costs
For more in-depth information on these different costs, read our blog article.
Schedule Your Project
You should create a detailed schedule that lists all the work to be completed, when each stage will start and end, and that estimates how much each stage will cost.
Requirements differ from lender to lender. Make sure you know what requirements your chosen lender has before you sign up with them.
How to Apply For a Loan
The term ‘fix and flip loan’ covers a number of loan and financing options, including:
- Hard money loans from a private investment group
- Home equity loans
- Cash-out refinance
- Individual lenders
- Crowdfunding from certain specialized websites
Though there is more than one option, hard money loans are considered to be the best fix and flip option. This is because, unlike the options presented by traditional banking institutions, hard money fix and flip loans are designed to address the particular needs of real estate flipping.
Qualifying For a Fix and Flip Loan
Different from taking a traditional home loan where the lender is most concerned about your personal assets and ability to pay the loan back, qualifying for a fix and flip loan is much more about the value of the property you are flipping and what your business plan is.
What a lender will look at is loan-to-value and loan-to-cost ratios. Will the property’s ARV (after renovation value) justify the loan?
What Documents You Need
As when applying for any loan, you will need to provide certain documents. These could include:
- Bank statements
- A driver’s license or other government-issued ID
- An executed sales contract
- Tax returns
- Documentation of other flip and fix projects you’ve completed (if applicable)
Some of the documents you need to produce may depend on which investor you are choosing. Orchard Funding provides one of the smoothest and easiest processes for fix and flip loans.
What About Experience?
You don’t have to have experience in house flipping in order to get a fix and flip loan. However, some investors may choose to only loan to house flippers with experience. If you are new to the business, Orchard Funding offers terms for both novice and experienced home flippers.
Credit Score Requirements
Even though your personal credit or property isn’t being put up as collateral, an investor will still want to check your credit score to see what your history of repaying debts is.
However, a high credit score is not necessarily needed for fix and flip loans. Most commonly, a credit score of at least 600, which is deemed fair credit, will be enough to qualify. Naturally, the higher your credit score, the better the chances are of your loan being approved, but a very high credit score is not usually a requirement.
The Hard Money Fix and Flip Loans Process
Depending on the provider you choose, the process for a hard money fix and flip loan doesn’t have to be complicated. Here at Orchard Funding, we provide an easy 5-step process.
- Fill out an application form
- You get a detailed loan proposal
- You provide us with documentation to receive a pre-loan approval
- Underwriting is completed
- Documents are signed and you receive your funding
The Right Private Investment Group
When deciding on a fix and flip loan lender, you need to see what the benefits are of working with them. Here are some of the advantages of choosing Orchard Funding.
- As direct lenders, decisions can be made quickly and with less documentation
- We advance up to 1/3 of the construction budget before any work has begun
- We release construction draws within 3-4 business days from the time of the request
- We charge no junk fees
- Interest is charged only on funds advanced
- We can close within 7-10 business days, or 2-3 business days depending on the loan type
So What’s the Bottom Line?
Fix and flip loans are a great way to get your foot on the real estate ladder and start making some serious profits. Hard money fix and flip loans are the most common type since they were designed specifically for the needs of flipping a house. However, it’s important to know all the costs and choose the right lender for your needs. Whether you’re a newbie or an experienced house flipper, Orchard Funding is the best lender for you. To get all the information you need on fix and flip loans or to apply for a loan, visit our website.