Finding a loan for your house flipping project is much different than a conventional loan you would use to buy a home you are planning to reside in.
For this reason, there are several loan options for those choosing to embark on this endeavor. Here are three of the most common options for your potential house flip.
1. Hard-money loan
These loans are often referred to as “rehab loans” and consist of short-term loans for Real Estate investments. These are issued by a private lender, unlike traditional bank loans. A hard-money lender is likely to be a mortgage broker or an investor(s).
The terms for this type of loan are shorter than a traditional mortgage, averaging between six months to one year. However, the interest rates are much higher, ranging from 12% to 21%.
For hard-money loans, you can expect to receive 60% to 75% of the property value for the home you intend on flipping. So, this equates to about a 25% to 40% down payment.
The pros of a hard-money loan are that the paperwork tends to go quicker, and lenders are more willing to accept a borrower with a lower credit score. The con is that lenders for a hard-money loan typically stay away from borrowers who have never flipped a home.
2. Cash-out refinance
This option allows you to use your personal home’s equity. This involves you re-financing your current mortgage and to take the difference in cash.
The new loan amount will consist of what you owe in addition to the cash you are taking out. If you had a loan of $200,000 and owe back $100,000, you would have equity of $100,000. You could refinance your mortgage for $150,000 and cash out $50,000.
To qualify for this type of loan there are three circumstances:
- Max of 45% debt-to-income ratio
- Minimum credit score of 640
- 30% to 40% of equity in your existing home
The pros of this financing option are that the interest rate tends to be lower than a hard-money loan or other funding options. The con is that you will have to pay closing costs.
3. Investment line of credit
This is a short-term financing option that is only used for buying investment properties. The loans last from 18-24 months and you can borrow as needed, up to an agreed upon limit.
This is the best kind of loan for those who have experience in flipping homes. This is because the borrowers are approved based upon their record of owning or flipping investment properties.
The interest rates on this type of loan ranges from 5% to 8% and can even let you borrow anywhere between $1 million to $50 million.
Other options
Although these three are the most common options to finance your house flip, there are other options out there. You could tap into your Home Equity Line of Credit or even raise the money through crowdfunding.
Whichever route you decide to go, always weigh the pros and cons and factor in your house flipping experience.
