How to Get a Loan to Flip a House

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How to Get a Loan: Flipping houses is a real estate venture. It involves buying cheap homes that need work, then fixing them up and selling them at a higher price than what you paid. Although house flipping can be lucrative, it also comes with significant financial risks, especially for newbies.

According to March 2021 data, home flipping sales and profit margins declined in 2020. However, industry experts believe these numbers are not surprising given the COVID-19 pandemic.

A bank loan is required to fund your real estate venture. The mortgage interest rates have been historically low since the second quarter of 2021. However, you will need to have strong credit to be approved.

KEY TAKEAWAYS

• Flipping a house is generally more expensive than buying one as a home.
• Lenders view flipping as risky and won’t lend to inexperienced flippers.
• Talk to other flippers about how you can vet private lenders.
• Flippers might consider crowdfunding.
• You will need to pay for the mortgage, renovations, insurance, and utilities until the house is sold.

Flipping Homes: The Costs

Although fixing and reselling properties fast can be very lucrative, flipping a house is much more expensive than buying a home you love. You will need the funds to purchase the property and the ability to pay for renovations and homeowner’s insurance.

Depending on your federal tax bracket, short-term capital gain tax rates of 10% – 37% will reduce any profits you make on properties that you flip in one year.

Getting started with house flipping is easier if you have the cash. It’s not 2005 when everyone could fog a mirror and get a mortgage without any down payment. Even if you are eligible for a loan with no down payment, borrowing to finance a flip will cost you more than borrowing to purchase a primary home. Because flipping is seen as riskier by lenders,

Inexperienced flippers are likely to be rejected by only a few lenders. They will ask you to show them that you have profitably sold at least one home. While they will pay higher interest and fees than an experienced flipper, others will accept a less-experienced person.

Hard Money Loans

Experts differ on the origin of hard money. It is often more expensive than traditional financing and offers “harder” terms. Some say it is because it finances houses that are difficult for traditional lenders to finance. 

Hard money loans have terms that are less than one year and interest rates between 12% and 18%. For example, if you borrowed $112,000 from a lender and charged two points, the total amount would be 2% of $112,000 or $2,240. Instead of paying points at closing like you would with a traditional mortgage, a hard money loan may only require you to pay points once your home is sold. It is the one thing that’s soft about hard money.

These expenses include marketing, staging, and commissions from real estate agents. If you stick to the budget, you won’t need to spend any extra money to flip your home.

However, the $2,240 in points will eat a large chunk of your $32,000 budget. If you pay 15% interest for six months, your total interest cost of $112,000 would be $8,400. These two expenses will leave you with $21,360 to spend on everything else, less if you have to pay closing costs. If the home sells for $160,000, you will make a $48,000 profit for six months, possibly without having to write a single check from your bank.

Hard money lenders typically expect interest-only monthly payments while the loan is in force. However, some lenders may allow interest to accrue but not require that it be paid until the sale is completed. Ask your lender if it is possible to delay paying the loan interest until you have sold.

Comparison of hard money and. Conventional loans

Lucas Machado is president of House Heroes, an investor group that flips homes in Florida and finances hard-money loans. He says the lack of bureaucratic red tape makes hard money loans easy. Unlike conventional banks, lenders are not bound by any guidelines about the property’s shape. “Properties in poor condition do not qualify for traditional mortgage financing. Machado states that hard money lenders expect to lend on houses in dire conditions.

A hard money lender will approve a loan if the purchase price and repair cost are comparable and the home flipper is reliable.

Hard money lenders only sometimes care about borrower qualifications like debt-to-income ratios or credit scores when evaluating flippers. Sometimes, lenders may request to see documents like tax returns, bank statements, or credit reports. They don’t care if (another difference with conventional lenders). Machado notes that “Should the flipper default,” the hard money lender can foreclose, seize the house and then sell it on their own.

A hard money lender will, similarly to a bank, hold the first lien on borrowers’ homes until they repay the loan. The borrower will still be the owner of the home and retain the deed, according to Mat Trenchard (acquisitions manager at Senna House Buyers), one of the largest Houston house-buying firms.

Where to Find Lenders

Online is an excellent place to look for a hard money lender. Lima One Capital, for example, will lend up to a 90% loan to cost and up to 75% to ARV to new flippers. The fees and interest rates will decrease depending on the borrower’s experience with flipping. Lima One lends to most states, with fees and rates that vary by state. Borrowers with lower credit scores than 680 may borrow less but have to pay higher costs. A minimum credit score is 660 Lima One Capital has a minimum credit score of 660.

The lender will determine the closing costs.

LendingHome is another example. LendingHome offers fix-and-flip loans up to 90% off the purchase price and 100% for renovation costs. To prove that they have the funds to pay the down payment or cover closing costs, borrowers must provide bank statements. Additional requirements include a purchase agreement, a list of past fix-and-flip projects, documentation, and the downpayment.

10 Interest rates range from 3.875% for rental projects and 6.50% to bridge loan projects.

Lucus Machado of House Heroes suggests that you reach out to local investors and agents to locate brick-and-mortar and hard money lenders.

Private Lenders

Senna House Buyers Mat Trenchard says that a private lender is someone with substantial capital who can lend you money. You would be amazed at how many people are looking to borrow money they have saved. They operate the same way as an HML [hard-money lender], but you will often get better rates and terms.

Trenchard believes private lenders might be more willing to negotiate payment terms than hard money lenders. In exchange for no interest, they may be open to being partners in the deal and taking part in the profits.

Trenchard states that confidence is critical for inexperienced flippers. They need to make connections and speak to other flippers about their willingness to pay and how they can walk away. Refrain from assuming that just because you didn’t agree to a loan offer with the first lender, you won’t be able to find the funds for the deal.

Local real estate networking events can help you find private lenders. Trenchard states that these individuals can charge anywhere from 8% to 12 percent plus zero to two percentage points. It contrasts with hard money lenders, who may charge between 12% and 15% with two to five points. They will place a first lien on the house, just like a bank or hard money lender.

How to vet a private lender

Expert professional flippers advise that the best way to evaluate a private lender is to talk to other flippers, which you will also meet at real estate networking events. Ask them if they have any experience with these lenders. What was the pricing they received? How responsive was the lender? You can also request references and call them.

Worst-case scenario: Often, a deal fails because the lender still needs to provide the promised funding. The buyer loses the earnest money deposit. Unexpected lender fees could also be a possibility at settlement. You could also run into legal problems over the terms of the contract or a lender trying to catch a borrower defaulting to foreclose the property. All of these are good reasons to verify the lender before signing anything.

Online Private Lenders

A private lender technically refers to a friend, relative, or another individual who does not make a business of lending money but is willing to lend you financing. This statement was made by Brian Davis, Spark Rental co-founder and real estate investor. 11

Private lenders may be used by companies that are privately owned. You can find them online, just like hard money lenders.

Anchor Loans is a Calabasas-based company that can help you close deals on many property types. They offer competitive interest rates in all 48 states. The terms vary from one state to the next.

According to the company’s website, flippers can borrow between $50,000 and $20 million to finance their home. Loans may be approved within 5-10 days. An initial down payment of 10% to 20% of the purchase cost is required. The borrower must have at least five flips within the last 18 months. Anchor Loans will approve loans for qualified corporations or multi-member limited liabilities companies (LLCs) with fewer than five flips in the previous 18 months. 12

Crowdfunding

Crowdfunding is a way for a group of individuals or institutions to finance loans. Each lender (also known as an investor) contributes a small amount to the borrower’s loan and earns interest.

Prosper and other traditional crowdfunding sites are not designed for buying or flipping houses. Prosper’s maximum loan amount is $40,000, intended for home renovations, debt consolidation, and small business funding. That’s where particular crowdfunding sites for residential real-estate flippers are available. Some companies will pre-fund your loan. It means that the company will close your loan quickly using its own money while waiting for investors to provide funding. Others will only close your loan once all investors have funded it. It could lead to a slower or even no closing.

Davis states that crowdfunding websites are in the same niche as hard money lenders. They are relatively costly but will lend to real-estate investors regardless of how many mortgages they have. The deal is primarily focused on the collateral and the quality of the deal.

Crowdfunding sites

Groundfloor provides loans in 31 states starting at $75,000 and ending in three weeks. No closing fees, taxes, bank statements, returns, or tax returns are required for loans less than half a million. Roll points are included in closing, and interest rates start at $55

Even if the loan is paid off sooner, borrowers must still pay at least three months’ interest. There are better options than the ground floor for inexperienced flippers.

Patch of Land offers fix and flip loans starting at 7.0%. The loan amounts range from $150,000 to more than $3 million. There are short closing times and a maximum of 85% loan-to-value. Depending on the type of loan, borrowers make monthly interest payments for their loans. They can do so for one to 36-month terms. According to Patch of Land’s website, it works with both first-time and experienced flippers.

Fund That Flip provides funding up to $100,000 for potential investors. It offers 100% financing, bridge loans, closing in seven days, three to 24-month terms, rates starting at 8.49%, and renovation costs that are covered by 100%. One caveat: The loan cannot be repaid by the owner. 18

Crowdfunding Drawbacks

Trenchard and Machado stated that they didn’t use any real-estate crowdfunding sites. Trenchard and Machado suspected that the crowdfunding process to evaluate and commit to a deal could be slower than for a borrower with a private or high-net-worth lender. If a flipper can establish a good relationship with a lender, they may be able to close a deal within 24 hours if there’s a great opportunity. All paperwork must be in order.

Crowdfunding sites may not allow you to negotiate, unlike private lenders. Because they have to manage many investors, they may have established parameters for each deal.

The bottom line

There are many funding options if you need more money to flip a house or lack the funds but still want to minimize your risk. You can get funding from a hard money lender, private lender, or crowdfunding site for real estate.

Trenchard states that if you know the options and where they can be found, as well as how to network, it is easier to find deals than to find the money. It is easy to find the money to make a great deal. But it isn’t easy to find great deals.

These options are more expensive than traditional mortgage financing for owner-occupied homes. Their cost is still high due to the risk taken by the lender and the unlikely possibility of getting a low-interest bank loan to flip your house. You can still get started with flipping if you need more cash. However, you can flip more properties and increase your profits once you have enough experience.

Disclaimer: This article is intended to provide information only. Neither Commercial Lending USA nor the author endorses these companies. Borrowers are advised to do their research before making a decision about which lender is best suited for them.

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