Financing a House Flip: 4 Types of 'Fix-and-Flip' Loans
If you're ready to take the leap and begin your first house flipping project, there are a few crucial elements to take into consideration. When undertaking a house flipping project, one element that is especially important to understand is what types of house flipping loans and mortgage rates will be available to you.
While flipping houses can be a lucrative endeavor, it is a venture that will require a large amount of funds. From the actual purchase price of the property to financing any structural or cosmetic repairs, there will be a lot of costs associated with this type of project.
Ultimately, with this type of investment project, obtaining the best loan and mortgage rates for your needs is imperative for your overall success. Read on to learn more about the most commonly utilized loans for house flipping projects.
Common loans for flipping houses
Check out the four most common types of fix-and-flip loans below.
Hard money loan
A popular fix-and-flip loan is the hard money loan, also commonly referred to as a rehab loan. With hard money loans, there are generally lower qualifications for approval, and investors can receive funding in as little as five days. The pre-approval for a hard money loan is very quick, taking minutes to be approved. Essentially, a hard money loan is a short-term loan utilized by many investors looking to purchase, renovate, and sell a property within one year.
Cash-out refinance loan
The cash-out refinance loan is another popular type of fix-and-flip loan used by investors looking to refinance an existing property, pay off the existing loan, and use the cash proceeds from the investment to finance a new property. One stipulation with cash-out refinance loans is that any money borrowed must first be used to pay off any existing liens before investors can use the remaining funds. This makes it more difficult for an investor that needs money to fix up a property before selling it, as the funds need to pay for liens before renovation.
Home equity line of credit
A home equity line of credit is similar to using a credit card. Lenders give home flippers a line of credit that is based on their primary residence’s value and available equity, which must be at least 30% to 40% to qualify. When you use the line of credit, you will only pay interest on the amount actually borrowed until it is repaid. However, these loans for flipping houses are only available when secured by an owner-occupied primary residence, so you are putting your own home in jeopardy if you default on this type of loan. The money is usually available in 30 to 45 days, and interest rates are typically 3.5% to 6.5% variable APR. The credit score required may be slightly less for a home equity line of credit in comparison to the other loan types. With this type of loan, the investor is required to have cash reserves for up to six months which could be difficult for some investors that have their money tied up in other projects.
Investment property line of credit
This is different from a home equity line of credit because the credit borrowed is leveraged against the investment property, not the primary residence of the investor. It works the same as a home equity line of credit in that you only pay interest on the money borrowed. This type of loan can be used for the actual purchase of the investment property and for any renovations of the property. It is usually a short-term loan for 18 to 24 months, and it takes about 30 days to obtain the funding. Interest rates are a little higher, usually starting at 6.99% at the time of this article.