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Some people just have an entrepreneurial spirit and a willingness to roll up their sleeves and get things done. But more than a few people feel restrained from maximizing their business potential because they don’t seem to have enough cash on hand.
The good news is that you don’t necessarily need deep pockets to venture into the house-flipping industry. An increased number of lenders recognize that house flippers can be a secure investment, under the right circumstances. Qualifying for a loan requires some due diligence and proof you can pay it back.
How To Get A House Flipping Loan
Traditional mortgage lenders are highly unlikely to float you a loan for this endeavor. If you think about it logically, a 15- or 30-year note doesn’t fit a relatively quick fix-and-flip scenario.
House flipping outfits typically work with hard money lenders. These resources generally approve loans with the idea that they will be paid off in a short period. In many ways, the business model employed by money lenders mirrors that of house flippers. You both want to invest, recoup your cash and enjoy a tidy profit. There are other sources to consider, such as:
- Crowdfunding: Internet-based platforms provide opportunities to request funding from a pool of investors. These people all contribute a small portion, which minimizes their risk. The interest rates can be exceedingly high in some cases.
- HELOC: House flippers can borrow against the equity in their home to invest in a house flipping project. A Home Equity Line of Credit does not necessarily set parameters on how the money is used.
- Private Firms: Some companies lend money through non-traditional channels as a type of business transaction. They may charge higher interest than some banks. The added expense can be factored into the resale expenses.
To qualify for traditional loans, you need to meet certain requirements. These typically include reasonably good credit scores, assets and a sizeable down payment that demonstrates you have a large investment and interest in the project.
How Does A House Flipping Loan Work
One of the reasons that hard money lenders and others remain open to business speculation projects stems from the fact a tangible real estate asset will be in play. You can anticipate that part of the deal will seat the lender as the first lien holder. Should the real estate market dip or offers don’t cover your expenses, the lender can recover its loan at the closing. In essence, the property serves as a security deposit. Fix-and-flip loans are typically determined in one of the two following ways.
- Loan-to-Cost: The borrower receives a percentage of the total cost. The other portion comes out of the house flipper's pocket. Fix-and-flip lenders allow broad flexibility about how you get startup money, unlike traditional banks.
- Loan-to-Value: In this scenario, the loan generally equals a percentage of the total anticipated market value after renovations.
One of the promising aspects of securing a loan from these sources is that you do not necessarily need previous experience. A sound business plan, good credit score, down payment and an independent property valuation can persuade a loan officer you are worth the risk of an 18- to 36-month note.
