Types of Loans for Purchase and Repairs of a Fix and Flip

An investor or contractor that is considering a fix and flip project can have several concerns. A standard home mortgage will not be considered because the home is not a primary residence for the flipper. A typical construction loan also may not be an option because most construction loans are based on a first-time construction of a new residence, and remodeling an existing residence is not the same as new construction.

There are many variables involved with a fix and flip project. Some typical investors do not wish to have their investment tied up long term if the property does not sell quickly. They only make money if the flip is completed by credible contractors, finished on-time, and sold quickly.

Fix and Flip Bridge Loan Terms

When investors locate a property they wish to purchase, they can either use all-cash offers or look for additional financing. Hard money lenders, direct private lenders, or banks are the common options.
The terms for a Fix and Flip loan can vary. For instance, the investors may encounter the following terms for a fix and flip bridge loan:

  • 80-90% on Loan to Value (LTV) or 65-75% After Repair Value (ARV)
  • Debt to Income Ratio Less than 50% preferably less than 35%
  • No current bankruptcies, foreclosures, or liens from other properties or projects
  • Proper paperwork submitted including but not limited to:
    • Purchase Contracts
    • Title Search Reports
    • Needed Repair Projects with Estimates (List of Sub-Contractors and references)
    • Estimated Sales Price After Repairs
    • Personal Financial Statements and Proof of Profitable past Fix and Flip Project(s)

Types of Lenders

Hard Money Lenders are not traditional lenders. Hard Money Lenders offer loans on the ‘hard asset’ or the property itself. Since they are willing to take a chance, they are often the only option for first time flippers. They charge higher interest rates, take longer to close, and the loans they offer have short terms of 12 months.

Some terminology is used interchangeably; however, there are very important differences between Hard Money Lenders and Private Lenders. Private Lenders may offer lower interest rates and can be more flexible in requirements and repayment schedules.

Although banks do not generally make Fix and Flip Loans, some will consider lending to experienced Fix and Flip investors. They are not typical mortgage loans, rather a line of credit that can be used during construction and repairs. Although their interest rates are lower than a hard money or private money lender, the benefits of a bank loan stop there. They are much more stringent on the requirements for financing, take upwards of 30 days or more to close a loan, and require a higher credit score, income amount, and available cash from the investor applying.

Financing Considerations

Once an investor has completed a profitable Fix and Flip project, they are likely to be able to find other sources of financing for future projects. Some may continue to use the lender they have built a relationship with and may receive lower interest rates. Others may try and accumulate enough returns on their investments to start funding deals completely with their own cash.

Fix and Flip Projects may not be the get-rich-quick projects that people see on television, but they can be quite profitable if the proper financing is found for their particular deal. Association of Private Lenders, Real Estate Brokers, and Real Estate Clubs are good sources for vetted firms.