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Fix-and-Flip Loan Options Expert Advice | REInvestorGuide
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Fix-and-Flip Loan Options Expert Advice

Tim LucasJuly 14, 2023
Fix & Flip Financing
A man in a hard hat measures a wall, showcasing precision in a building interior.

A fix and flip loan can help you buy, fix up, and sell a home, hopefully for a profit.

These are short-term loans meant to give you enough time to acquire and rehab the property, list it for sale, close the transaction, and repay the loan.

Whether you’ve never flipped a house before or you’ve done dozens of flips, here’s a tool that can help you launch or grow your business.

Why do I need a fix and flip loan?

If you want to flip properties, this is one of the few loans that allow it.

The lender knows upfront that you will open and close the loan quickly, and that you won’t be living in the property.

Most traditional loans won’t work. For one, most properties that are good flipping candidates are too beat up to qualify for conventional or low-down-payment mortgages.

Second, most loans like FHA, VA, and USDA are only for homes you plan to live in, not for a home you plan to sell.

Fix and flip lenders know that your plan is to fix and sell the home fast.

How does a fix and flip loan work?

A fix and flip loan starts with a conversation with a lender that specializes in these loans. Don’t call just any lender: most don’t offer these loans.

When you find a lender, you discuss your project. If it’s feasible, they can approve the loan in minutes and offer a proof of funds letter. This is a document you show to the seller when you make an offer.

You send the lender your required documentation then close in 5-7 days after the appraisal and title work are complete.

At closing, you pay the down payment and closing costs.

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Once the loan is closed, you go to work on the property. The rest of the process looks like this:

  • Pay for first phase of remodel/fixes out-of-pocket (for example, a bathroom)
  • When complete, the lender inspects that phase
  • Get reimbursed costs of the first phase from the loan
  • Use that money to pay for 2nd phase
  • And so on

When all phases are complete, you list and sell the home on the open market, then pay off the loan.

Fix and Flip Terminology

Before we go on, here are some terms you’ll need to know.

Loan-to-cost (LTC): The loan amount the lender will give you based on the entire cost of the project. For example, a home is $150,000 and the rehab budget is $50,000 for a total of $200,000. If the lender offers 80% LTC, the maximum loan would be $160,000.

After-repair value (ARV): The amount the property will be worth after rehab is complete and, hopefully, the future sales price.

Interest only: A loan where no principal is paid each month, but only the interest due.

Proof of funds letter: A letter from the lender confirming the amount of funds available.

Inspections: Lender review of the work completed for each rehab phase. An inspection is needed before issuing funds to reimburse you for each phase’s rehab costs.

Points: Fees charged by the lender. One point is 1% of the loan amount.

Fix and flip maximum loan amount

Following are guidelines for most fix and flip lenders. Generally, lenders will cover 80-90% of the purchase price and 100% of the repairs, up to the following maximums:

  • 70-75% of after-repair value (ARV)
  • 80-90% Loan-to-cost (LTC)

Here’s an example.

Purchase price$200,000Repair budget$50,000Total cost$250,000After-repair value (ARV)$325,00080% LTC$200,00070% ARV$227,500Maximum loan (lower of 2 calculations)$200,000

In the above example, you could get a loan of up to $200,000 based on the lower of the two calculations. To get a bigger loan, you would need to find a lender with a higher LTC maximum of 85-90%.

How much money do I need to get a fix and flip loan?

It is nearly impossible to get a zero-down fix and flip loan, although there may be a few lenders out there who will do it.

Typically, you need in cash:

  • 20% down on the property
  • Closing costs (likely 4-5% of the home price)
  • Cash for the first phase of rehab

Let’s look at the above example again, where you are buying a property for $200,000 and putting $50,000 into it.

Home price$200,000Down payment$40,000Closing costs$10,000First phase of project$5,000Total needed upfront$55,000

Some lenders will allow you to borrow more, but in general, you do need a substantial amount of your own funds to get started.

Can first-time home flippers get a fix and flip loan?

First time flippers are welcome at most lenders. Expect to need a down payment of 20% of the home’s price for your first flip.

Experienced investors may only need 10% of the home’s upfront price. All the more reason to make sure your first flip is successful: your second one will eat up less of your own money.

Fix and flip documentation

These loans require slightly different documentation compared to traditional loans. Perhaps the biggest difference is that you do not need income documentation like W2s and tax returns.

  • Appraisal (ordered by the lender)
  • Title
  • Insurance
  • Articles of Incorporation, operating agreements
  • LLC docs
  • Bank statements proving adequate assets such as down payment funds and closing costs

Other fix and flip requirements

  • Credit score: 640-660+
  • Property type: single-family, multifamily, condos, commercial
  • Property use: Investment/non-owner-occupied only
  • Loan term 6-12 months
  • Personal income: typically not verified
  • Buying entity: corporations, LLCs, individuals

Fix and flip loan fees

Lenders must make their money in a short amount of time, so expect higher fees for home flipping loans compared to traditional loans. Percentages refer to the loan amount.

  • Points: 2-4%
  • Lender fees: Processing, underwriting, and others: $1,000+
  • Extension fee (if project is not complete in time): 1-2%
  • Appraisal, title, escrow, and other 3rd party services: $3,500+
  • $100-$200 inspection fee for each phase of the project

Fix and flip rates

Rates are higher for these loans because you are only carrying the mortgage for a few months. You can expect rates of 10-12% or higher.

While these rates sound steep compared to a traditional, long-term loan, look at the real cost: the annual cost of borrowing divided by 12, times the number of months the project will take.

Say you have a flip that will take 5 months to complete.

  • Loan: $250,000.
  • Rate: 12%
  • Yearly cost: $30,000
  • Monthly cost: $2,500
  • Interest cost over 5 months: $12,500

This still sounds like a lot. But if the after-repair value, for instance, is $100,000 more than the acquisition and repairs, you’re still making good money.

Note: You only pay interest on funds borrowed. So your starting loan amount in the above example might be $200,000, then $210,000 the second month, etc., as you borrow more to complete each phase of the project.

Pros and cons

Pros

  • Buy and fix up a home with one loan
  • Finance homes that traditional lenders won’t touch
  • Lender is aware it’s a non-owner-occupied loan and you only need financing for a few months
  • Avoid mortgage fraud by using an owner-occupied loan without living in the home

Cons

  • High rates and points
  • High extension fees if the project takes longer than expected
  • Large risk if you can’t sell or refinance into a long-term loan

Fix and flip loan alternatives

These loans aren’t the only way to finance a fix and flip.

  • Home equity loan on your primary residence
  • Home equity loan on an investment property
  • Other hard money loan types
  • Private investor (for example, an individual might agree to finance the project for a percentage of the profit)

FAQ

Yes. However, remember that you are on a strict timeline and it may be less costly to pay to have the work done quickly than to try to finish the project on nights and weekends (assuming you’re not a full-time flipper). The lender will charge 1-2% of the loan amount to extend beyond the original loan term.

Unless you find a private investor who is willing to finance the whole project, it will be hard to find a lender to assume all the risk on a project. Most lenders will finance 80-90% of the acquisition plus repair costs, depending on the as-repaired value of the home.

No. Conventional lenders expect you to carry the loan for many years, so paying it off after a few months is unfair to the lender and may burn bridges with that lender. In addition, you commit mortgage fraud if you plan to get an owner-occupied loan for a home you don’t plan to live in.

This rule says the most you should pay for a home is 70% of the after-improved value of the home minus repair costs. For example, a home will be worth $300,000 after $50,000 in repairs. The most you should pay would be ($300,000 X 0.70) - $50,000 = $160,000.

Wrapping up: Fix and flip loan can lead to a successful real estate career

Fix and flip loans are a tool to help you make a profit by rehabbing a house no one wants in its current state.

Flipping gives new life to a house and a turn-key home to a buyer that doesn’t want to deal with renovations. It’s a worthwhile pursuit.

While it’s not without risk – and a steep learning curve – those who are motivated and willing to learn can make a great living buying and flipping properties.

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