When it comes to buying a property that you plan on renovating and reselling, a fix and flip loan is exactly what you need.
Fix and flip loans work a little differently than conventional mortgage loans. If you are planning on working with a hard money lender to finance you for a fix and flip loan, there are a few things you should know before meeting with potential lenders.
Fix and flip loans are formed to assist in the purchase and rehabilitation of a home or property to either rent or resell. Fix and flip loan terms vary with each lender. Typically, these loans are short-term, ranging from 6 months to 3 years. The purpose of the loan duration is for borrowers to sell the property before the loan balance is due. The last payment is a balloon payment, and the borrower will have the funds from the sale of the property.
Since fix and flip loans are short-term, they carry higher interest rates than conventional home loans. The benefit however, are investors will receive funding in less than 2 weeks, unlike bank loans which can take 30-90 days to receive funding.
Because hard money lenders are not banks, each lender has their own unique rules for lending. For example, a lender can finance up to 80% of the property’s after-repair-value (ARV). The ARV is what is the property is expected to sell for after renovations are complete. Interest rates will vary from lender to lender and also may be affected depending upon the borrower’s experience in these types of projects. Typically, interest rates run from 7.99% to 18%
What Lenders Need
Before applying for a fix and flip loan, there are a few things to consider that may increase your chance of approval. Lenders want to feel that you have some financial skin in the game. Borrowers will need to put anywhere between 15% – 50% of the property’s value. That money has to come from the borrower. Lenders will not fund down payments. There are select borrowers that offer 100% financing, but it is important to read your contract carefully. Typically, 100% financing comes with insanely high interest rates. Be prepared to show the lender the estimate for completing the project. This will include construction costs, goods and any possible labor.
Lastly, lenders will look at your track record. The more experience you have, the easier it will be approved. It is possible that, for your first fix and flip loan, you may be required to put your personal assets as security on the loan. Once, you have a proven track record, that won’t be necessary.
Before you apply for a fix and flip loan, it’s a good idea to do your homework.
Carefully research lenders in your area that fit your specific needs; Remember, it may sound perfect, but it is imperative to read between the lines. If it is too good to be true, it most likely is just that.
NMLS 1057378 | AZMB 0923961 | MLO 1057378
22601 N 19th Ave Suite 112 | Phoenix | AZ | 85027
111 Congress Ave | Austin | Texas | 78701
About the Author: Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 43 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.