fix and flip loans

All About Fix and Flip Loans

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March 5, 2024

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Rehabbing homes remains a great source of income because acquiring property has long been a sound investment. However, you’ll require fix-and-flip loans to meet your needs, whether you’re a first-time flipper or a seasoned investor.  Learn everything you should know about these residential rehab loans to get started.

What Are Fix-and-Flip Loans?

As the name indicates,  fix-and-flip loans provide financing that allows you to purchase a property for rapid resale and profit. As such, these loans have distinct terms from traditional mortgages.

For example, these loans offer short-term financing instead of the longer ranges you see with conventional home loans. Also, fix-and-flip loans focus more on the property’s value and your business plan than your credit score, allowing buyers with unique circumstances to take advantage of them.

Why Should You Use a Fix-and-Flip Loan?

Fix-and-flip loans can be an attractive option to get your rehab project off the ground for many reasons.

Leverage

Leveraging is the practice of borrowing capital to take advantage of a good opportunity to make money now instead of waiting until you’ve earned the cash some other way. Many successful companies have used this type of good debt to fund growth.

Fix-and-flip loans are a way regular folks can borrow to build a home rehabbing operation. This reduces the amount of your own cash you have to put into a property and lets you take on more projects than you might be able to otherwise.

Easier Approval

Fix-and-flip hard money lenders are much more flexible than traditional lending institutions. For example, banks focus primarily on your credit score and have strict guidelines that they are unwilling to modify.

Instead of doing thorough background checks, combing through your employment history, and focusing on your credit score, alternative lenders use the property as your loan collateral. They also examine factors that prove you’ll be able to make a profit and repay the loan.

Speed and Flexibility

This process is much quicker than traditional lending. Instead of going through an underwriting process that takes months, you’ll have an answer within a couple of weeks or even a few days in some cases.

Also, the flexibility in lending standards means that you have more options for qualifying than you might with a bank. Fix-and-flip loans allow you to negotiate with a cash offer that gives you the maximum competitiveness.

How Does a Fix-and-Flip Loan Work?

Your lender calculates the value of your loan by examining one of a few key formulas and setting a maximum loan percentage of that number:

ARV: Your loan could be some predetermined percentage of the property’s after-repair value. If the home will be worth $300,000 after your renovation, a 75% ARV can get you a loan of $225,000.

LTC: The loan-to-cost ratio considers the loan amount against the project’s cost. This takes into account such expenses as the property’s purchase price and other associated costs with listing and transactions.

LTV: The loan-to-value ratio compares the loan amount to the property’s purchase price. This is more common for commercial properties.

A residential rehab loan often relies on ARV or LTC. You will often get your loan as a term loan without prepayment penalties, but you might also be able to receive it as a line of credit.

What Are the Best Types of Residential Rehab Loans?

Instead of being a one-size-fits-all solution, you can pick from various types of fix-and-flip loans.

Hard Money Fix-and-Flip Loan

Hard money loans are short-term loans that you secure with the real estate you’re purchasing. These have somewhat higher interest rates, but you typically pay them off within a few months or years once you flip the property.

Cash-Out Refinance

A cash-out refinance is common for clients who have existing investments or personal property with equity. You borrow against the value of that property to purchase a new investment property, which usually requires at least 30-40% equity for approval. Cash-out refinancing typically has lower interest rates than a hard money fix-and-flip loan.

HELOC

As with a cash-out refinance, a home equity line of credit (HELOC) is a loan in which you use the existing equity in a property for new financing, in this case, the home you live in. You can only get a HELOC if you have at least 15% home equity. The convenience and great interest rates make HELOCs one of the top fix-and-flip loans for a continuous stream of credit as different costs arise.

Property Line of Credit

A property line of credit is like a HELOC, except you’re leveraging an investment property that you don’t live in. This is a favorite of experienced flippers.

How Do You Get a Loan From Fix-and-Flip Hard Money Lenders?

You can improve your odds of getting approval for a fix-and-flip loan by following a few key steps.

1. Create Financial Projections and a Business Plan

Calculate and outline how much money you will require in a financial projection. Include the project’s timeline and the scope of work. This helps you to understand if your loan request is reasonable before you approach a lender.

2. Compare Loan Options

Decide which type of loan suits your needs from the options above. If you’ll have expenses come up gradually, it can be safer to use a line of credit. Opt for a term loan when you need a lump sum.

3. Find a Good Lender

You need a private lender who understands fix-and-flip loans and doesn’t have the restrictions that banks do. You can research online from the reviews and testimonials or talk to other flippers. Fortunately, Florida residents have an experienced lender in Associates Home Loan.

4. Apply and Close

Once you know what financing you need and where to get it, all you have to do is talk to a loan officer. Prepare to fill out paperwork that shares the key details about your financial projections and business plan, but the officer will help you understand what you need to do.

Find the Right Financing Solutions for Fix-and-Flip Loans

When you’re ready to learn more about fix-and-flip loans, our mortgage professionals at Associates Home Loans have the answers you need. Our mortgage solutions have helped hundreds of clients around Florida earn great returns on their investment properties. Contact us to get the right financing today!

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