Loans for House Flipping: Options for Real Estate Investors

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If you prefer fix-and-flip projects, you know how crucial it is to have money available to grab great deals and cover renovation costs. Most investors need loans for house flipping to ensure they have enough capital to handle the details of flipping houses.

Fortunately, there are many kinds of loans for flipping houses, and just like shopping for a mortgage for your primary residence, you should know what to consider when looking at house-flipping loans.

Property investors have options to finance fix-and-flip properties, including conventional and even hard money loans.

Here’s a summary of the available loan options for flipping houses, including the pros and cons of each, to help you decide.

Hard Money Loans or Private Money Loans

Hard money lenders are often private lenders or nontraditional lenders that focus on the property value versus your credit history. They often go by the name bridge loans, hard money loans, and rehab loans. 

Hard money loans fund much faster than traditional loans, and their primary focus is on the property value, not your credit scores. However, they are short-term loans; keep that in mind when considering your options.

Qualifying for hard money loans for flipping houses

Hard money lenders have different requirements than traditional mortgage lenders. They are easier to qualify for in some aspects, yet others may be tougher.

For hard money lenders, the primary focus is on the property value, which shows lenders how much collateral is in the property. If a borrower defaults on the loan, the bank takes possession of the property. 

In the case of fix-and-flip loans, lenders focus on the after-repair value, or how much the home will be worth after you renovate it.

The more equity you have in a property, the easier it is to qualify. Equity is the equivalent of your investment in the property. 

For example, an investor who invests $10,000 is riskier than an investor who invests $50,000. The less money you invest, the more the lender must provide.

Other factors hard money lenders consider include:

• Ability to repay: You must prove you can repay the money borrowed, which can be through traditional income or your experience in fixing and flipping houses.
• Loan-to-value ratio: How much you borrow compared to the home’s value helps lenders determine the riskiness of the loan; the higher the percentage, the riskier it is for the bank.
• Credit history: Lenders check your credit history, even if they don’t put as much emphasis on the scores as traditional mortgage lenders do.

Pros

There are many benefits a hard money loan offers, including:

• Negotiable terms: Most hard money lenders allow borrowers to negotiate the terms based on their specific needs for fix-and-flip loans.
• Fast funding: You can usually get the loan money much faster with a hard money loan versus a traditional mortgage that can take as long as 45 days.
• Credit history is not as important: A hard money lender will check your credit, but they may not focus on the score as the only factor when deciding if you qualify for financing.

Cons

Just like there are good sides to a hard money loan, there are downsides to consider:

• More expensive: Hard money lenders usually charge higher interest and fees, including 2% to 6% of the purchase price in origination fees, plus other costs like title, inspection, and appraisal fees.
• Large investment required: Hard money lenders want investors to have “skin in the game,” which usually means an investment of 20% to 30% before they’ll fund a loan.
• Federal and state regulations: Some states have stricter hard money loan requirements than others, including how much lenders can lend or charge, which can make it more difficult to reach your goals.

Home Equity Lines of Credit

A home equity line of credit is a loan against your existing property. A HELOC is a draw on the equity or the portion of the property you own by paying off the mortgage or investing your own money into the property.

Most home equity line or home equity loan lenders allow loans up to 70% to 80% of the home’s value. This means you’ll need significant equity in the property before you can borrow money from it.

You may also have the option for a home equity loan, which is similar to the HELOC, but instead of receiving a line of credit, you receive the funds as one lump sum.

Lenders calculate the equity in the home by taking the home’s market value and subtracting any current liens. For example, if a property is worth $300,000 and you have a $100,000 first mortgage on it, there is $140,000 available in equity to draw from it after deducting the $100,000 you already owe on the first mortgage.

When choosing between HELOCs and home equity loans, keep these factors in mind:

• HELOCs provide funds as a line of credit, and you are only required to pay interest on the withdrawn funds.
• Home equity loans provide the funds at once, and you pay principal and interest on the entire amount.

Qualifying for home equity lines of credit for flipping houses

Qualifying for home equity lines of credit for flipping houses isn’t as hard as qualifying for traditional mortgage financing, but harder than the qualifications hard money lenders require. Like any mortgage financing, each lender has different requirements for HELOCs, but here are the most common:

• Good credit: You’ll need a good credit score, usually 660+, to get home equity loans or lines of credit; it varies by lender.
• Equity: You must have equity in the property you want to borrow money from, usually 70% to 80%.
• Income: You must have standard income (pay stubs, W-2s, and/or tax returns) and prove the ability to repay the loan.
• Appraisal: You must have an appraisal conducted on the property to prove its value.
• Clear title: The lender will order a title search to ensure there aren’t any liens on the property.

Pros

There are many benefits when applying for a home equity line of credit, including:

• Flexibility: You can withdraw funds as needed, reusing the funds after repaying the principal (like a credit card).
• Interest-only payments: You only pay interest on the funds you withdraw, not on the full amount.

Cons

It’s always a good idea to look at the downsides of home equity lines of credit to ensure they are a good fit:

• Good credit required: Most lenders require good to great credit to qualify for a home equity line of credit
• Easy to overspend: Having access to a line of credit can allow spontaneous and unnecessary spending, making it hard to achieve your fix-and-flip goals.

Cash-Out Refinance for Flipping Houses

You may consider a cash-out refinance if you own a primary residence and have equity in it. Unlike a home equity line of credit, this is a first lien on your property, but it may offer better rates or terms than you currently have on your mortgage.

Like a HELOC, you’ll need equity in the home to tap into; most lenders require you to leave at least 20% equity untouched, so you can have up to 80% of your home’s value outstanding. Keep in mind that when you use the equity from your primary residence, you put your home at risk of foreclosure if you don’t make your payments.

Cash-out refinance loans are available from traditional lenders and can be government-backed loans, such as FHA and VA, or conventional loans, which you can also use to buy an investment property. 

Remember that a cash-out refinance on your primary residence puts your home at risk of foreclosure if you don’t keep up with the payment schedule.

Qualifying for cash-out refinance loans for flipping houses

Cash-out refinance loans may be the hardest to qualify for, but often have the best interest rates. Unlike a hard money loan, a cash-out refinance is not a short-term loan. 

You also don’t make just interest payments. You must pay principal and interest on the full loan amount for the entire term, which can be 10 to 30 years.

To qualify, many lenders require the following:

• Strong credit: You don’t need perfect credit, but usually a score of 660 or higher is the minimum credit score needed to get approved for traditional mortgages like a cash-out refinance.
• Stable income: You must prove you have stable income from a job or your own business to secure financing from a cash-out refinance.
• Adequate collateral: Lenders rely on the property’s value. Should you default on the loan, they take possession and sell it, so the home must have enough value to get approved to use the home’s equity.

Pros

Traditional financing, such as a cash-out refinance, offers benefits, including:

• One loan: You only have one loan to manage, versus worrying about a first and second mortgage.
• Lower interest rates: Interest rates on a first lien are usually much lower than the interest rates offered on secondary financing, such as a HELOC or hard money loan.
• Predictable payments: Understanding the loan terms and required payments is essential to success, and first mortgage liens have predictable payments and terms.

Cons

Despite all the positives of a traditional mortgage for house flipping, there are some downsides to consider:

• You risk your home: If you can’t make your payments, you risk losing your home over money borrowed to fix and flip a property.
• Higher payment: When you borrow more money, you increase the size of your payment, which can make it harder to afford.
• High closing costs: The closing costs on a first mortgage are typically higher than those on other loans, making it a more expensive option.

Personal Loans for Flipping Houses

Sometimes you can get the money you need from your personal network. A personal loan can get tricky if things go haywire, but if you dot all your i’s and cross all your t’s, you can get the money you need without dealing with any lenders.

A personal loan from friends or family can mean many different things. For example, you might receive a gift from a family member interested in what you do or create a formal loan agreement with a family member that includes origination fees, interest charges, and repayment terms.

There isn’t a right or wrong way to have a personal loan, as long as everyone is on the same page regarding interest rates, closing costs, and repayment terms.

Qualifying for personal loans for flipping houses

The nice thing about borrowing from friends or family is there aren’t any banks or lenders to handle. There also aren’t any strict qualifying requirements like you’d find with a bank loan. This doesn’t mean your friends or family willing to lend the money won’t have requirements, but you may, in many cases, more easily borrow money from them.

To make it work for everyone, consider the following:

• Clearly state your needs: Be upfront about how much money you need to borrow for house flipping.
• State the timeline: Tell the person lending the money your timeline for flipping houses, so everyone is on the same page regarding the return of the principal.
• Have a written agreement: Even if you’re borrowing from a family member, put everything in writing, so there aren’t issues or disagreements down the road.

Pros

Borrowing money from friends and family can be simpler; here are some pros:

• No lender requirements: You can usually borrow money from friends or family much easier than meeting strict bank requirements.
• Fast funding: Most friends and family willing to lend you money will do so quickly, allowing you to take advantage of hot deals.
• Lower cost: You may not pay as much in interest or closing costs when you borrow from friends or family versus borrowing money from a bank.

Cons

Here’s what to consider when borrowing from friends or family:

• Can get uncomfortable: If there is a misunderstanding or you don’t repay the loan as agreed, it could cause relationship issues.
• May not get as much money: Friends and family may not be able to lend you as much money as you’d be able to borrow from a bank.

Seller Financing for Flipping Houses

Sometimes, sellers are willing to offer the financing for a house they’re selling, especially for house flippers, since they are typically short-term loans. Most seller financing is short term, meaning sellers don’t give buyers 30 years to repay them, as traditional mortgages allow.

Seller financing isn’t a one-size-fits-all lending option, as it depends on the seller’s requirements. For example, one seller may require a balloon payment with no payments required until then, and others may require monthly payments with interest, ending in a balloon payment at the end of the term.

The key is to determine what the seller needs and see if it fits within your personal finances.

Qualifying for seller financing for flipping houses

As mentioned, qualifying for seller financing depends on the seller, but some factors to consider include:

• Down payment: Most sellers want some type of down payment even when you flip a house, so find out how much they require before deciding if it’s a good fit.
• Monthly payments: Determine if sellers want monthly payments while you renovate the house, or if you can repay the full amount plus interest by the loan’s maturity date.
• Interest: Sellers usually charge interest to lend you money, so find out how much they’ll charge and see how much it adds to the loan amount you must repay.
• Terms: Pay close attention to the loan’s terms, including balloon payment requirements, to ensure they fit within your plans for the fix and flip.

Pros

Seller financing can provide a faster way to own a property; here are the pros:

• No banks: You don’t have to deal with banks or jump through hoops to get your financing.
• Close faster: Sellers typically can close the sale faster when they provide the financing, depending on their requirements.

Cons

• May not be enough: Sellers may want a large down payment that, if you don’t have one, will make you ineligible for the financing.
• Strict requirements: Some sellers have strict requirements that make it hard to enjoy owning the fix and flip.

How to Find the Right Lender for Your House Flip

Finding the best loans for house flipping means finding the best lender to suit your needs. The right lender depends on how much financing you need and your qualifying factors. 

Some common places to find lenders for house flipping include:

Network with other real estate investors

Not all real estate investors are your competition. Get friendly with others in the industry and exchange information about some of your best resources, including lenders. You may find the best lender from your conversation with a fellow investor!

Consult with your real estate agent

Your real estate agent likely has plenty of resources available, including lenders. Let your real estate agent know what type of lender you need or what qualifying factors you have to give him an idea of what you need. A good real estate agent has a large network of professionals including lenders, appraisers, title companies, and contractors.

Use the BiggerPockets Lender Finder

If you don’t have the time or patience to do the legwork yourself, have it done for you with the Bigger Pockets Lender Finder. 

You can find investor-friendly lenders on your terms, getting connected with the best lenders. Have access to reviews and ratings, and close more deals faster. You’ll have access to a trusted network of lenders who can guide you from your first investment property purchase to growing your real estate portfolio. 

Final Thoughts

When looking for loans for house flipping, you have many choices. The key is to find the most affordable one. Consider the interest rates and closing costs when determining which loan is right for you. Also, consider the loan terms and how long you have to repay the loan.

Fix and flips are usually a fast process, but you shouldn’t take a loan you aren’t sure you can repay on time. Work with your lender and discuss your intended timeline, giving yourself a buffer to ensure you can meet the loan agreement requirements.

Which types of funding have you explored? Which do you prefer? Why?

Comment below. 

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.