Using construction loan or traditional financing

[Joseph Dasmerces]

Hey everyone quick question looking forward to everyones feedback, 

We have 150k, We are actively searching for a deal to add value too and flip. We have a great relationships with our local bank and wanted to know would it be wiser to take out a construction loan or go the traditional route, When looking to Buy, Reno, & Flip?

[John O'Leary]

Hey Joseph,

I deal strictly with the construction loan (Hard/Private Money) side so I can shed some light on possible terms/ expectation but Given your strong ties with your local bank, it would be wise to consult a loan officer for tailored advice. They might have specialized products for flippers or even suggest a combined approach.It's also valuable to discuss the pros and cons of finalizing the deal under an LLC or Corporation, considering both tax implications and legal standpoints.

Rehab/Construction Loan:

• - Most lenders offer between 85-90% of the purchase price and cover 100% of the rehab funds.
• - Rehab funds are typically escrowed, and you'll operate on a draw/reimbursement system. - --- You'll only pay interest on the rehab funds as they're used.
• - Interest rates generally range from 9.5-11.5% (interest-only) over a term of 12-18 months.
• - These loans are often granted to an LLC or Corporation rather than an individual.
• - Unlike traditional loans, Hard/Private money lenders don't base their qualifications on DTI. - - They also don't require tax returns, income verification, or extensive bank statements. --- ---- Moreover, credit checks are typically "soft" pulls for such short-term loans.
• - The average closing timeframe is around 14 business days.

Refinancing Considerations:

• - If you intend to transition the property into a rental, be mindful of the seasoning -requirements for cashing out, especially if you’re switching from a construction loan to a traditional one.
• - Some lenders offer a DSCR loan right after rehab completion, while others might stipulate a 3-6 month seasoning period before allowing cash out. It's my understanding that most traditional loans require a 12-month seasoning before cash-out refinancing. However, I'd appreciate any corrections or clarifications from other members on this point.

Traditional Financing:

• - Interest rates are typically lower than construction loans.
• - There might be no provision for extra renovation funds. Consequently, you may need to -allocate a considerable portion of your $150k towards the down payment and renovation.
• - Might have a hard credit pull, and qualify more on DTI (needing more paperwork)
• - Might require a higher down payment