Flipping a house is a term that is commonly used in the real estate industry. It refers to the process of buying a real estate property, for example, a house, fixing it quickly and flipping it for more than you have initially paid for it. As with anything else of this nature, there are certain risks that come with it. The process can get quite expensive with the risk factor that can result in you losing your entire investment.
Due to this exact reason, many investors opt to go for financing for house flipping. Loans for flipping homes became a staple in the industry as they significantly reduce the risk factor for both investors as well as lenders. A flipped house is a quick way to make a profit if you know what to do and how to do it.
If you are interested in the business of flipping houses for a profit, there are certain things you need to know first. With so many different home flipping loans, it is important that you know which one suits you the best. Additionally, if you are not sure how to get financing for flipping houses, then you are in the right place. We will help you determine the best loan for flipping houses in your current situation. Moreover, we will cover the options you have as well as all of the how-to questions you might have. Now, let’s dive right into the topic.
How to get a loan to flip houses: Getting started
To begin with, depending on what flip loan you are planning to get, there are certain things you need to worry about first. To get any kind of money loan, every lender will look at your personal finances. This is important because they need to be sure that you will be able to pay back the loan they give you with the added interest. Specifically, they will look at your income, credit score, debt level, business plan, and lastly your assets.
When it comes to it, lenders will look at every source of income that you have before they provide you with any financing options. This includes everything from your salary, rental income, investment dividends, as well as your overall monthly cash flow. Having a higher income is not technically necessary in order to get a loan, but it will definitely make your chances higher.
To go into more detail, lenders have a specific way to calculate your income. In most cases, they will take your hourly wage and multiply it by 2080 hours which represents your work year. After that, they will divide the result by 12 to get your overall gross income per month. Additionally, there are more details that you need to inform yourself about. For example, if you work a part-time job. In order to count it as a genuine income that your lender will consider, you need to provide proof that you worked at that job for at least 2 years. This includes any secondary job you are working at no matter what.
Furthermore, bonuses and overtime that you achieve at your job can also count as an income only if your employer verifies that it will remain a constant in the future. If not, then sadly it does not count as a source of income. Inform yourself beforehand if you want to know whether or not your source of income counts and can get you a better loan option.
The credit score is one of the best indicators to the lender if they should provide you with a loan or not. A good credit score shows your lender that you are a trustworthy borrower that pays their debts on time and in full. To be considered good, the minimum credit score you should have is 670, while anything up to 850 is considered amazing. Of course, the higher your credit score is the better, as it will make it easier for you to get a loan.
However, if you do not have that good of a credit history, all is not lost as you can still get a loan. That being said, you will most certainly have higher interest rates and fees to deal with because of that.
Furthermore, lenders also use a credit scoring system from which they can get predictions on your credit behavior. This will help them find out if you will be able to return the loan on time-based on the information they get from the credit card reports which show if you have any credit card debt.
As long as you do not have a bad credit score, your rates and fees will remain normal.
Another thing that a potential lender will look at is your debt to income ratios or DTI for short. With this, they can determine just what percentage of your income goes towards your monthly bills and other debts. Preferably, you should always have a debt to income ratio that is under 30%.
Having debt is not a bad thing. It might sound terrible at first, but with proper management, debt can serve as an asset. As long as you keep control, there is nothing to worry about. Additionally, debt consolidation is always an option. It allows you to take out a new loan in order to repay your current loans. The main reason why you would want to use debt consolidation loans is to end up with an overall lower interest rate that will give you lower payments each month.
Financing a house flip is a serious investment for a lender. Naturally, you will have to convince a lender that their investment will be worthwhile for them. This is where a business plan comes in. With a solid plan, your chances of getting a loan will increase drastically.
A good financing plan needs to cover several important parts. First of all, you will have to present just how much you expect the property in question to appreciate. Additionally, it is crucial that you state how much of the money you will designate as the renovation cost.
Lastly, you might also have to provide the lender with your investment history as well. This way they can feel reassured that you know what you are doing and that their investment is safe.
Your assets are also something a potential lender will be interested in. Everything from your stocks, bonds, crypto, commodities, savings, home equity, and real estate properties, all the way to retirement accounts is considered an asset. Considering that home flip loans are large sums of money, a lender needs to be sure that you can pay them back in the end.
They will want to know what assets you have to make sure that if the situation arises you will be able to sell them to pay them back. They might even ask you to put up several of your assets to serve as collateral. This should not come as a surprise or something negative. This way a lender only wants to assure that at the very least they can get their investment back as they are taking the majority of the risk when it comes to financing house flipping.
How to Get a Loan for Flipping Houses? – Top 6 Financing Options
There are several different methods of acquiring a flipping loan. Depending on your situation, some might offer better options than others. If you are somewhat new to the whole ordeal, then house flipping loans might be confusing to you. Here we will cover 6 types of loans that you can get in order to cover your house flipping project.
As a real estate investor, you need to be able to select the best loan option for you so you end up with a larger profit. Now, here are the 6 most popular house flipping loans currently on the market.
Hard Money Loans
To start with, we have hard money loans. These loans come from private lenders and are the majority of the time given as a type of short term loan. This is usually between 1 and 3 years. Additionally, a hard money loan is given from a pool of money that is funded by several wealthy individuals. Because of this, these loans do have a somewhat high-interest rate. They are also referred to as fix and flip loans because of how fast they are.
These loans are an amazing option for investors that need the funds fast. They are much more lenient on the requirements meaning you do not have to have a perfect credit score or small amounts of debt. Hard money lenders do not care about that as they will cover their investment with a property you are working with.
This way, you do not have to worry about your personal funds serving as collateral meaning in the worst-case scenario you will lose the property as collateral which covers both you and the lender. Of course, this is not an ideal situation, but considering that you get the funds fast and with few questions asked, the risks will be higher in comparison.
Private lenders are basically wealthy people that invest in real estate agents. These investments usually come with a steep price. This type of real estate investing is different as you do not pay the loan back with interest over a longer time period. Private money lenders will instead take part of the profit as a payment. This is usually around 50% and sometimes even more depending on the terms you agree to.
This type of loan is best suited if you are working with high-value properties in wealthier networking circles. The best way to find an investor like this is to contact your friends and family that might be well-off financially and can invest, or as an alternative, they can introduce you to someone that is able and eager to invest in your project.
This is a loan for flipping houses fast and the deals are rarely held back by documentation. Furthermore, the terms for these loans are completely negotiable so both sides end up happy.
Getting a loan to flip a house through conventional means refers to loans that are provided by banks or mortgage lenders. These traditional mortgages are best suited for investors that have a good credit score that is also followed by a high income. In these situations, investors are able to put a considerable down payment for the property in question.
Getting mortgage loans requires that you provide evidence that you will be able to pay the monthly payments without missing any of them. Due to this, it is required that you have a good credit score. This is anywhere from 670 to 850 credit score. Additionally, it is important that you have no bankruptcies or foreclosures that might stain your record. Lastly, your DTI, debt to income ratio, needs to be fairly low being about 40% or less while you also need to have a down payment that is 3% or more of the total price in order to qualify for traditional mortgage loans.
When it comes to mortgage rates, they are fairly low and the closing costs and fees will not be as high either.
These loans are provided by smaller banks that are local to a certain area. The funds are in entirety provided by a bank. To qualify for this loan, you need to have a property deal ready before you even ask for a loan.
These loans are very flexible as in most cases you will not have to have a good credit score or a high enough income as long as you have a good plan. Furthermore, these loans are approved extremely fast. Once you qualify, you can expect to get a loan in as fast as a week or two.
This type of loan is between a homeowner and the buyer of the property. This is a more personal loan in nature as there is no need for unnecessary documentation or long waiting periods.
If you have a lower credit score or no cash, without other options for borrowing funds, then this loan might just be what you were looking for. The payment is quite simple as it is completely negotiable. What you agree upon is what you will abide by.
Pros and cons of seller financing are that the terms are much more affordable, and the interest rates are higher compared to conventional loans.
This type of loan involves a number of private investors that pool together small sums of money in order to lend it to investors in need. What is great about this loan is that it helps investors that do not have well-developed networking connections.
In order to get this loan, you will have to be an experienced real estate agent. Most importantly, keep in mind that you will have to go through an interview process where they will determine if you can become a regularly active borrower.
A major benefit of this is that you will have access to a large sum of money which offers a better loan option compared to other loans.
Some flaws include sign-up fees as well as higher interest rates than other loans.
The Costs of Flipping a House
The process of flipping homes can be a great way to earn a profit. However, depending on what kind of property you want to flip, it can get expensive really quick. Because of that, flip house financing became a popular way of borrowing money for investors.
That being said, when you want to flip a house, not only do you need the funds to buy the property in question, but you also need additional funds in order to renovate it so you can sell it for a profit.
By borrowing money to make a quick fix and flip, you are in turn paying back more than you have borrowed in the first place. Due to this, when you add up all of the costs from purchasing to returning the borrowed amount plus interest, there is a great risk factor involved.
Even though there is a big potential to earn a lot of money, there are also risks that you need to understand before you start investing. Additionally, if you are not an experienced investor, many lenders will probably see you as too high of a risk to even consider giving you a loan. On the other hand, those who are willing to provide you with a loan will most definitely charge you higher interest rates and fees.
The main goal you should focus on is to find cheap properties where you have a much higher margin to make a solid profit.
A purchasing price is the amount of money you need in order to buy the property in the first place. When you are borrowing money from a lender, you will still need to have at least some percentage of the price ready as a down payment. This can all vary depending on what type of loan you are working with. In general, a necessary down payment when you are working with a flip loan is about 20% to 25%.
The next expense on the line after you purchase a property is the renovation costs. In order to successfully sell a property for a profit, you need to make some improvements to said property.
That being said, depending on the size of the property and how much you have to invest in order to fix it will determine the renovation costs. For example, let’s say that the property in question is a smaller house. Depending on the severity of the renovations, you can expect to pay up to $10,000 in renovations. On the other hand, if the property is on the bigger side, these costs can easily jump up to $100,000.
This is why, before you get a flip house loan, it is crucial that you evaluate if the property is worth it in the first place. If you know someone that has worked in the industry for some time now and has the experience, ask them for advice. Bring them to see the property and let them help you during the evaluation.
If the property has structural damage then the profit margin may be too low compared to the risks you need to take.
The most commonly overlooked expense. Carrying costs are the expenses that you need to cover while you own the property. Many inexperienced investors tend to forget about them. However, if you do not take them into account when you are doing the math, you can very easily lose a major chunk of your profits.
First, there is interest. It is a percentage you will have to pay depending on the loan you go for. Second, you need to consider the costs regarding utilities. Electricity, water, trash removal, and gas all need to be paid for while you are the owner of the property. Third, homeowner’s association fees will also bring a monthly cost that you need to consider. Fourth, property tax is a big part of carrying costs. When you flip a property, you will have to pay a short-term property tax that will be the same as an ordinary income. Lastly, there is insurance. In order to get a loan, a lot of lenders will require that you first purchase insurance.
The last thing you need to worry about is the selling costs. Even when you are selling the property, there are some costs that you need to worry about.
If you decide to hire a real estate agent to help you sell the property, you will have to pay a commission to the real estate agents, which is usually about 6% of the total selling price. On the other hand, if you decide to work on your own, you will have to spend money on marketing. Finally, you also need to consider escrow fees, recording fees, and title fees all depending on the terms you negotiate with your buyer.
Summary: Loans for Flipping Houses
To summarize, flipping houses provides a great opportunity for investors to earn money. That being said, in order to get into the business of flipping houses, you will need a sizable investment. Due to this investors turned to investment loans. However, it is crucial that you understand the risks that loans bring to your investments. Doing the necessary research is a crucial step before you rush into anything. Before you start looking into how to get a loan to flip a house, make sure that you know all of the potential risks and how to avoid them.