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How to Secure Funding for Your Fix and Flip Project

If you are planning to get into the house flipping business, a fix and flip loan could be exactly what you need. Fix and flip loans work slightly different than regular home loans. So, if you would like to get approved for this kind of financing, it is important to keep a few things in mind before you actually meet with a lender.

What is a Fix and Flip Loan?

A fix and flip loan is designed to cater for the purchase and renovation of a property so that it can be sold or rented out. The loan terms generally vary among lenders but these loans usually have relatively short terms. The idea is that you will manage to sell the property before the full loan balance is due then pay it off using the proceeds.

Fix and flip loans typically higher interest rates in relation to traditional loans since they are usually short-term loans. However, there’s an advantage to using this type of loan to fix up a property since you can get the funding within as little as a few days or weeks instead of having to wait several months.

Where Can You Find Fix and Flip Funding?

Fix and flip loans are available from a variety of sources each with its own rules for lending. Here are the 3 most popular options:

Hard Money Lenders: A hard money lender can finance up to 65 percent of the property’s After-Repair Value (ARV), which is what you believe it will be worth after the renovations are complete. Approval through a hard money lender generally does not take too long and you don’t require a great credit score to qualify. However, you can expect to pay interest as high as 18 percent on this loan.

Bank Fix and Flip Loan: If you have a great credit score, you can get your fix and flip loan from a bank. The terms will vary depending on your bank, but the great thing is that you might not have to pay as much interest if you use this option. However, banks will want to see evidence that you have an established record of successfully flipping properties, so it might not be the best option for beginners.

Crowdfunding. It is a relatively new funding method of funding fix and flip projects. The terms that real estate crowdfunding platforms offer are usually similar to those of hard money lenders, although you can see a difference in the kinds of fees that you are actually expected to pay.

What Do Lenders Look For?

It is important to remember a few things before you apply for a fix and flip loan that may increase your chances of approval:

Personal Financial Stake: Lenders want to be sure that you have a financial stake in the property. Lenders are usually only willing to finance fix and flip loans up to a maximum of 85 percent of the purchase price or 65 or 70 percent of the ARV, which means that you have to put between 15 and 35 percent of the property’s value to get the ball rolling.

Estimated Repair Costs: You should also be ready to show the lender the exact amount you think it will cost to complete the necessary repairs and renovations. If you do not have any detailed estimates available, the lender probably won’t take you seriously.

Personal Financial Track Record: If you have a history of flipping houses, this is likely to work in your favor. Otherwise, you will need to have a steady source of income and a decent credit score. You might also need to give a personal guarantee that involves pledging personal assets as security against the loan.

Final Thoughts

It is important to carefully research lenders before you apply for a fix and flip loan to find one that meets your needs best and offers the best terms. If you simply take the first deal offered to you without reading the fine print, you could find yourself sacrificing a greater portion of your profits than you would like when it comes to time for selling.