Fix and Flip Loans for Beginners [Complete Guide]
This is a complete guide on fix and flip loans for beginners.
You’ll learn about loan requirements, loan rates, repayment terms, hard money lenders and more.
In other words:
We’ll show you how to close fast and make less mistakes.
Here are the most important topics that beginners need to know about fix and flip loans.
What is a Fix and Flip Loan?
Real estate investors use fix and flip loans to purchase, renovate and then resell a property for a profit. This form of short-term financing is used to buy foreclosures, fire damaged homes, complete gut rehabs and other distressed properties. The goal is to find undervalued real estate in need of significant repair, fix them up and sell them at and above market pricing.
These type of loans typically have a repayment period of 6-18 months. This can vary depending on complexity, permits, number of contractors, housing market conditions and more. They’re used to quickly buy properties that need some sort of renovation. The loan helps pay for the renovations so that the property can be sold for a profit.
Fix and flip loans are perfect for short term financing needs. However, since lenders take on more risk, interest rates tend to be higher than traditional 30 year bank-originated mortgages.
How do Fix and Flip Loans work?
Your lender and financing needs will determine how your fix and flip loan is structured. Generally, these loans are secured by the property you’re purchasing or renovating. To assess loan eligibility, fix and flip lenders use either the loan-to-value or after-repair value ratio.
Loan-to-Value Ratio
Loan-to-value ratio (LTV) compares your total loan amount to the acquisition cost of the property (purchase price). The maximum LTV for fix and flip loans is usually 90%. Meaning a hard money lender will lend you $90,000 on a $100,000 property if the agreed upon LTV ratio is 90%.
After-Repair Value Ratio
The after-repair value (ARV) is the most common ratio used for fix and flip loans. ARV calculates the estimated market pricing of the property after renovations have been completed. You can expect the maximum ARV to be 75%. Meaning you will get a maximum of $75,000 if they expect the resale value to be $100,000 after renovations.
LTV vs ARV for Rehab Loans
To summarize, ARV loans are calculated based on the market pricing of the post renovation property. This means when a rehab loan lender uses the ARV ratio, you’ll have more money for renovation costs, construction materials, labor, etc.
Types of Fix and Flip Loans for Beginners
Here are the different types of fix and flip loans for beginners. This chart also contains alternative types of loans for flipping houses.
| Type of Loan | Description |
|---|---|
| LTV hard money loan | Short-term loans that use the loan-to-value ratio (LTV). Usually used for commercial property loans. |
| ARV hard money loan | Short-term loans that use the after-repair value ratio. In some cases require you to use a real estate property or equity as collateral. Usually offered by private lenders or investor groups instead of banks and credit unions. |
| Home equity line of credit | Commonly referred to as home equity lines. HELOC’s allow you to borrow money from the equity you already paid off on your home or investment property. These are usually interest only loans and act as a second mortgage. |
| Cash-out refinancing | Cash-out refinancing is the process of pulling out cash by taking out a larger mortgage. |
| 401(k) loans | 401(k) loans allow you to borrow money from your retirement savings account. These typically come with maximum borrowing limits and repayment time limits. |
| Personal loans | Personal loans are usually available to those with good credit and good financial history. These are typically $35,000-$50,000 and are available at your traditional bank. |
| Friends and family | Borrowing money from family and friends in exchange for interest payments or a share of potential profits. While not advisable, it’s another form of fix and flip financing. |
| Seller financing | Sometimes, the seller of the distressed property will lend you money to renovate the property. The seller benefits by selling their property and by collecting interest payments. |
Fix & Flip Loan Terms, Interest Rates and Fees
Every hard money lender has different loan terms, interest rates and fees. Everything is based on your experience, credit score, private lender risk tolerance, type of loan, loan duration, market conditions and more. These are estimated loan rates and fees to expect.
| Type of Loan | Description |
|---|---|
| Minimum Credit Score | 660 |
| Interest Rate | 7.50%-15% |
| ARV Term | 6-24 months |
| Down Payment | 10-20% |
| Loan-to-After Repair Value | Maximum 75% |
| Minimum Loan Amount | $50,000+ |
| Experience required? | No. New investors welcome. |
| Type of Loan | Description |
|---|---|
| Approval Time | 10-30 days |
| No Prepayment Penalty | No |
| Interest-Only Payments | Yes |
| Possible Closing Costs | Processing Fee: $500 Underwriting Fee: $500 Appraisal: $300-$650 Origination Points: 1-3.5% |
| Rehab Inspection Fee | $150-$250 |
What are Fix and Flip Loan Requirements?
Hard money lenders require borrower’s credit score to be at least 660. They will also assess the cash and/or equity the borrower can contribute. This includes not just the down payment but also the financial means to repay the loan. Also, hard money lenders give weight to the borrower’s experience in flipping houses. Private lenders offer better flipper financing terms to those who have more experience in property flipping.
5+ Fix & Flips per Year
Usually receive the best pricing: 1-1.5% Points, 7.5%-8% interest-only payments and 75% ARV.
2-4 Fix & Flips per Year
Average flipper can expect this tier: 2% Points, 9%-11% interest-only payments and 60-75% ARV.
0-1 Fix & Flips per Year
First time flippers: 2-3% Points, 11%-13% interest-only payments and 50-70% ARV.
Fix & Flip Loan Process
- Application process: The borrower applies for the loan and provides details about the property they wish to purchase, as well as the renovations they plan to make.
- Property evaluation: The lender evaluates the property to determine its current value and potential after-repair value (ARV).
- Loan approval: If the lender is satisfied with the borrower’s financial position and the potential for profit, they may approve the loan.
- Funding: After approval, the lender disburses the funds in stages. This covers the purchase price of the property and the cost of renovations.
- Repayment: The borrower is responsible for making payments on the loan, typically with a short-term period of six months to a year. The loan may be interest-only or require principal and interest payments.
- Renovations: Renovations are completed on the property.
- Sale of property: After the property is renovated, the borrower sells it and repays the loan in full, including any interest and fees.
How to Close Fast on a First Time Fix & Flip Loan?
Closing a fix and flip loan quickly requires preparation, communication, and documentation. Here are some tips to help you close a first time house flipping loan quickly and efficiently:
Prepare financial documents: This includes your credit report, W-2, 1099’s, 2 years of tax returns, 6-12 months of bank statements, and any other relevant financial documents.
Get pre-approved: Before you start your property rehab search, get pre-approved for fixer-upper financing. This will show the lender that you are a serious borrower and can help speed up the process.
Choose the right lender: Look for a hard money lender who specializes in fix and flip loans. They are more familiar with the process.
Respond quickly: Not responding quickly slows down the loan process.
Provide a detailed plan: Timelines, budgets and scope of work. This gives lenders confidence in your ability to execute the project & repay the loan.
Who Offers Fix & Flip Financing for New Investors
Hard Money Lenders
Hard money lenders specialize in fix and flip loans for beginners. Since they take on more risk, expect higher interest rates, larger loan amounts and flexible terms.
Traditional Banks
Very few banks and credit unions offer fix and flip loans. While the application and approval process is stringent and time-consuming, the interest rates are slightly lower.
Can Beginners Get Fix and Flip Loans?
Yes, a beginner can get a fix and flip loan, but not through a traditional bank. Chase, Citi, Bank of America and other traditional lenders have strict guidelines, lots of paperwork, stringent financial requirements and generally don’t lend to new investors. Conventional loan lenders (banks) analyze if you can afford your primary residence (home) and your fixer-upper at the same time.
Rather than looking at the property, traditional banks look at your income. They analyze your debt-to-income ratio and see if you can pay two mortgage payments at the same time. On the other hand, hard money lenders are asset based lenders. They offer loans based on the property purchase price, experience in flipping homes, resale value, market conditions and risk tolerance.
Hard money lenders are like credit card companies. They all want to run your credit score and have you fill out an application. Each application is a hard pull on your credit report, which decreases your overall credit score. You will weaken your credit score and end up paying high interest rates if you apply to the wrong lenders.
How to get a Fix and Flip Loan for Beginners?
Here’s how to get a fix and flip loan for beginners with or without experience. There are hundreds of asset based lenders, if not thousands. Each of them specialize in certain types of real estate loans. However, they’re all happy to take your application and run your credit.
Every time you apply, your credit score takes a hit. Too many hard pulls and you’ll come off as desperate. Hard credit pulls take 2 years to come off. So, applying for loans on your own is a sure way to a bad credit score.
The best strategy to get a fix and flip loan is to work with a broker. Someone who’s an expert at matching lender’s loan requirements to your financial position. Whether you’re looking for no money down or a lender that approves flippers with no experience, an experienced broker can help. Fast access to short-term financing allows you to grow your real estate portfolio.
Let’s get you funded
Best Hard Money Lenders offering Fix and Flip Loans for Beginners
The same loan for the same property can be 8% with one lender and 15% with another. It’s important to find a hard money lender that specializes in fix and flip loans for beginners.
Our experienced brokers will find, match and arrange the best loan terms for your investment property. We have access to hundreds of private lenders that have different risk tolerances.
Free Consultation for Beginners
Curlee Capital helps find, match and arrange fix and flip loans for beginners. We have access to an extensive list of hard money lenders that work with every type of house flipping loan. Send us a message to get started.
Contact us to get:
- Free consultation
- Hard money lender expertise
- Less than 1 hour response time
- Up to 75% ARV
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