Fix and Flip Loans: What They Are and Best Options

The fix and flip loans is a short-term loan that real estate developers use to purchase and renovate the property to sell later on for an income, a method called house flipping. 

The business loans for small businesses are often used to buy residential properties or finance renovations and improvements in addition to covering the costs associated with selling and listing the property.

How can a fix or flip loan function?

Fixed and flip loans may be structured in various ways, like term loans or lines of credit, based on your chosen lender and financial requirements. They are usually secured by the home that you are purchasing or remodeling. 

Fix and flip lenders use the ratio of loan-to-value or value after repair to determine how much funds you're eligible for on your loan. 

The ratio of the loan to value, or LTV, is a measure of your loan's size to the worth of the property. The maximum LTV offered for fix-and-flip loans is generally 90 percent. For instance, if you're purchasing a $100,000 home, a lender showing 90 percent LTV can lend you $90,000. You must provide the remainder of $10,000 for a down payment. 

While LTV is usually employed for traditional commercial actual property loans, the after-repair value, or ARV, can be more commonly used in conjunction with fixes and flips loans. The appraiser's estimation of the value of the property after renovations are completed. 

For instance, an institution offering 70 percent ARV would give a maximum amount of $140,000 for a home worth $200,000 after the repairs. It is possible to take out more loans from a lender that bases its loan amounts on the ARV.

Different types of flip and fix loans

Type of loan	Best for
Loans for hard money.	People with poor credit ratings or those who aren't able to obtain an alternative form of finance.
The Home Equity Loan or Equity line of Credit.	Homeowners with at minimum 15% equity in their primary residence.
401(k) loans.	House flippers with retirement savings, but who aren't yet near retirement age.
Personal loans.	House flippers with excellent personal credit, who require only a tiny amount of financing.
Seller financing.	Flippers who require funding quickly and are able to locate a seller who will collaborate with them.
Credit line for business.	Experienced flippers who are looking for flexible financing.

Loans for hard money

The loans are known as hard money loans provided by privately owned online businesses like Finance of America Commercial and Kiavi. A few crowdfunding platforms online offer hard money loans, and multiple investors pool their money to help fund your idea. 

Hard money lenders typically have flexible eligibility requirements and can offer fix-and-flip loans in as little as a matter of 1-2 weeks. 

The terms of repayment for these loans could vary from six months or three years, contingent upon the lending institution, the qualifications of the applicant, and the particulars of your venture. While hard money lenders look at your credit score and financial background when evaluating the application, they typically concentrate on what they can do with your home, making these loans to fix and flip loans suitable for novices and those with less than perfect credit. 

This is why hard money lenders could be more expensive in terms of interest than other fix and flip lenders.

Home equity line or loan of credit

A Home Equity Loan, also known as a home equity line, allows accessing capital based on the worth of your home. Home equity loans, also known as HEL, are the option of a lump sum money, while an equity line of credit, or HELOC, permits you to draw money from the credit line to the limit, depending on the need. 

To be eligible for a credit line or home equity line credit, it is necessary to have a minimum of 15% of equity on your property, excellent credit, and a sufficient monthly income to pay for your mortgage and repay any HEL HELOC. 

The terms of mortgages for equity in the home typically are between five and 15 years, while credit lines typically have terms for repayment that range from 10 to 20 years. The amount you can get for a HEL, as well as a HELOC, will depend on the home's worth, the proportion the loan allows you to lean against, and how much you're still owing to your mortgage.

For instance, you have 30 percent equity in the house you bought for $300,000. You still owe $210,000 for your mortgage. The bank could extend you the maximum credit or loan line of about $45,000. 

Lines of credit may provide fixed and flip financing at low-interest rates; however, you'll need to own an apartment and be prepared to put your financial security at risk.

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401(k) loans

If your pension plan offers loans, you can choose to use your 401(k) to fund your fix and flip venture. This is not an excellent option for people nearing retirement, but it might be worth considering for younger flippers. 

Most employers' 401(k) accounts permit you to borrow up to 50 percent of the balance, of $50,000 or 50%, which is lower. Individual 401(k) programs for self-employed persons also allow loans of as much as $50,000. You'll pay an interest rate on your loan; however, the loan is yours, and you're paying the principal and the interest directly to you. 401(k) loans must be paid back within five years.

It is easy to be accepted for 401(k) funding; however, this fix-and-flip loan method has some disadvantages. Removing funds from your retirement account could put your savings in danger. 

If you quit your job, you may be required to repay the loan in total. If your fix-and-flip project does not succeed, you'll be losing your retirement savings. It is essential to weigh the advantages and risks before deciding on this financing option. 

Personal credit

If you can get a personal loan to fund your business, the loan can serve various uses, such as the house flipping project. Personal loans are offered at favorable rates of interest and terms that typically span between one and seven years. 

However, personal loans are typically smaller than other types of business loans, with a maximum of out at about $50,000. Also, you'll need an excellent credit score to qualify for this kind of loan, which is a fix-or-flip. If you fail to pay the loans, you'll risk your assets and credit history in danger. 

>>> MORE: Evaluating a Property for Fix and Flip

Seller financing

Seller financing, also known as owner financing, occurs when the property's owner acts as a lender. It is a common practice to pay the seller, along with interest, according to an agreed-upon schedule. You and the seller discuss a price to cover the project's cost.

Some sellers make the loan the option of a balloon payment. This means you'll make interest-only payments up to the specified date. Then you'll need to pay the loan balance, or the seller could take possession of the property. 

It is best to consult an attorney to create the official commercial loan contract to ensure you can put all conditions and terms written down and there are no disagreements between you and your seller. 

Seller financing is an option if you're not eligible for other loans that are fix and flip. It's also an easy financing option if you can locate an owner willing to collaborate with you. 

This kind of loan could be more expensive because sellers want to make more money from their properties by allowing you to take out a loan.

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Line of credit for businesses

House flippers who are established can use the commercial line of credit to fund their projects. Business lines of credit allow you to access a particular amount of cash you can draw upon when you require it. You only pay interest on the amount you spend.

Due to the flexibility, the business line of credit provides a fix-and-flip loan is an ideal option for those uncertain about how much renovations will cost or the length of time it will take to complete a renovation. 

And unlike the HELOC, You don't need to sell your house to get an unsecured line of credit for your business. The lenders will examine your score on credit, the amount of time you've spent in your business's financials, and personal financials to determine if they are eligible. 

Traditional and online lenders offer credit lines for business. However, institutions like credit unions or banks provide the best rates and conditions. You'll require excellent credit, a lengthy period in industry, and solid financials to obtain an enterprise line of credit from the bank.

How do you get a fix-and-flip loan?

Loans for fixes and flips are challenging, particularly for those new to the field. Once you've gained experience, it will be easier to have a better getting the most feasible loans. 

Three steps are required to find your company's perfect fix and flip loan.

1.   Be aware of your needs for financing.

You must take all the relevant information regarding the fix-and-flip project and then create the scope of work and a feasible timeline to estimate the costs accurately. Once you've got a clear idea of what it will run, it will be easier to determine the amount of money you need for business financing.

2.   Evaluate your qualifications

When you have a better understanding of the amount of funding you'll require, you'll be able to assess the credentials of your business -- experience in the industry, annual revenues, and your credit score to determine what repair and flip loans you'll be eligible for.

If you're a fix-and-flip novice, you'll need to rely more on your credit rating and financial history to get finance. Experienced flippers can use their portfolios of house flips and the financials of their business to obtain loans.

3.   Find the perfect lender.

The most suitable lender for your fix and flip loans will differ based on the financing you require, the particulars of your plan and credentials, and other factors. You must research and evaluate several Small-Business lenders to locate one that offers the lowest rates and conditions.

It is a good idea to talk with other house flippers about their experiences with financing and get suggestions or inquiries regarding lenders. The person you choose to work with has expertise in house flipping and can provide examples of their work with other lenders.

The nearby Real Estate Investors Association or club could be a good source for investors to meet and gain the most reliable lending partners.

>>> MORE: Quick Tips to Fix and Flip Homes

Check out your options for business loans.

The most beneficial business loan is typically one with the lowest rate and the most favorable terms. However, other aspects -- such as the time it takes to fund and your company's requirements -- can aid in determining which loan you should pick. CommercialLendingUSA suggests looking at small-business loan options to find the suitable one for your company.

This article was first published on Fundera, an affiliate of CommercialLendingUSA.

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