The number one obstacle for investors (both new and old) is money. Money is required in every aspect of making a fix-and-flip deal—you need capital to buy and renovate before you can sell for profit. This means that if you want to be successful as a property flipper, you have to know where to draw funds. Without further ado, here’re four types of fix-and-flip loans.
Hard Money Loan
The hard money loan, also known as the rehab or private money loan, is the most popular loan type among fix and flippers. Unlike conventional loans, the private money loan is a short-term loan (typically one to three years) with higher interest rates ranging from 7% to 12%. It’s secured with already existing real estate properties and can be used to buy, renovate and sell a property as soon as possible. Because of its less stringent requirement and fast approval (as little as 15 days), this loan type is ideal for fix and flip investors.
Who is Eligible?
As it has been said above, the hard money loan is suitable for anyone who wants to invest in the fix-and-flip strategy. This loan type provides investors with fast funding to help them secure any property they want. Also, it can be used to finance a property in a miserable condition which is not allowed by conventional lenders. If you want to be eligible for this type of loan, you have to either be an experienced flipper with past projects (at least two successful flips) or a first-time flipper who agrees to work with a licensed and experienced contractor.
The bridge loan is also a short-term loan, but unlike the hard money loan, it only serves as quick financing for a certain period. It covers the gap between two real estate deals and serves as a temporary loan. It’s usually shorter than the hard money loans—typically between two weeks to a year. The only difference between a hard money loan and a bridge loan is that it cannot be used to finance rehab.
The bridge loan is ideal for an investor who wants to buy another property but does not have a feasible financing option. It allows you to buy a second property when you have no possibility of selling the first one as soon as possible. For example, an investor who has recently bought a property and does not qualify for a second mortgage can apply for a bridge loan to buy the second property if he thinks it’s financially reasonable to do so.
Who is Eligible?
The bridge loan is feasible for any flipper who finds a great deal and needs to secure acquisition financing before the property is sold to another buyer. Since it is just an interim financing option, lenders typically don’t follow the normal lending protocol, like checking credit score and financial history. So, if you want to apply for the bridge loan, you need to have a minimum of 20% equity in the existing property and be financially capable to pay two mortgages concurrently. Also, make sure the lender is aware of your exit strategy and prepare to pay a higher interest for the period of the loan term.
Cash-out Refinance Loan
A cash-out refinance is another means of financing a fix-and-flip deal. As its name implies, it is a strategy where an investor refinances an existing property and uses their equity on the property to finance a new acquisition. For example, an investor who has $100,000 equity in a property that has a value of $200,000 can apply for a cash-out refinance loan. All he/she needs to do is apply for a new mortgage that is higher than the value of the property—and cash out his equity of $100,000 on the property.
Unlike the traditional refinance loan, the investor is not restricted on how to spend the excess money received from the deal. Another difference to note is that a cash-out refinance is regarded as a first lien— an investor has to settle previous loans (including the primary mortgage) before receiving their equity. Therefore, lenders treat it as a new mortgage, meaning you would have to pay all required expenses such as the closing costs, appraisal fee, underwriting, and other necessary fees.
Who is Eligible?
The Cash-out refinance loan is only available to fix-and-flip investors who currently own up to 30% equity in the property. They’re investors in need of financing, that don’t want to apply for a hard money loan, but want to compete with other buyers in the market. However, unlike other loan types mentioned above, a cash-out refinance can only finance a loan-to-value (LTV) ratio of 75%. Other requirements include a minimum credit score of 640 and a maximum of 45% debt to income ratio.
Home Equity Line Of Credit (HELOC)
The home equity line of credit (HELOC) is another method of financing a fix-and-flip deal. Unlike all other methods, the HELOC works more like a credit card, which means you only pay interest on the funds you use. The better side of this funding type is that it’s either a first or a second lien, meaning you can take it alongside your existing mortgage. Another thing to note is that a HELOC can only be taken on the investor’s primary residence.
Who is Eligible?
Since it works like a credit card, it is usually treated as such. Interest is charged on only the amount you use until you repay. If you are applying for a HELOC with your primary residence, you are eligible to take the loan. Like the cash-out refinance, there is no restriction on how you may use your funds. Other requirements are similar to that of the cash-out refinance; a maximum of 85% loan-to-value (LTV), a 45% debt-to-income ratio, a credit score of 640 and you should be ready to pay between 4.5% to 5.5% interest rates.