Types of Loans for Flipping Houses
When consumers seek a loan to purchase and then flip a house, there are other options besides the traditional 15 or 30-year mortgage. Loans for flipping houses cover a variety of financing options. Thankfully, many loans are even easier to get than a conventional mortgage, and it takes less time to complete the loan process.
Borrowers should know the pros and cons of the different loans for flipping houses so they can make an informed decision. In many cases, mortgage rates will affect the terms of the loan. So, borrowers should also pay attention to the market to ensure the best possible rates for certain types of loans.
Costs involved with flipping houses
When an individual purchases a home for residential use, he or she is primarily concerned with the monthly mortgage premium. There are, of course, other costs associated with homeownership, but the mortgage payment is primarily the largest monthly expense.
This isn’t the case with flipping houses. Borrowers need to secure more financing or consider the many other costs associated with flipping a house in addition to the costs of owning the home for a period of time. These costs include:
- The Down Payment — Required for many types of loans for flipping houses.
- Financing Costs — Mortgage rates on conventional mortgages can be quite low but rates on other loans for flipping houses can actually be 10 percent or higher.
- Homeowner’s Insurance — Even those who don’t plan on owning the home for long still need a policy during the period of ownership.
- Renovation Costs — Flippers need to factor in the estimated costs of the renovations required.
- Real Estate Costs — There’s also the consideration of the real estate agent commission fees the seller will pay when they sell the house. This can significantly lower the profit margin.
Choosing the right loans for flipping houses
Once a prospective house flipper learns about the different costs and expenses involved in flipping houses, the next step is to learn more about the different loans for flipping houses.
Hard money loans
A hard money loan is one of the more common types of loans for flipping houses. That’s because the credit requirements are not as strict as with a conventional loan, and the approval time is usually much quicker.
If a person has a lower credit score, a hard money loan could be a great option. However, the individual must also be aware of how much equity they have in the home, as a higher down payment might be necessary. Additionally, origination fees and interest rates will likely also be higher.
Private loans
If an individual has a good relationship with a bank, it may be possible to secure a private loan. Private lenders typically have more financing term options to offer, but the borrower will need to be able to prove that they are not a high risk for defaulting on the loan.
Personal loans
Personal loans are very easy to get, but also usually come with a higher interest rate. It might also be hard to get a personal loan for the amount needed to purchase and flip a house.
Bridge loans
A bridge loan is a short-term loan normally ideal for the purpose of flipping houses, except in cases where the person doesn’t sell the home as quickly as they thought. Then, the flipper will need to secure more financing to cover the costs of the home until it is sold. Bridge loans also have higher interest rates, but they are quicker to get than a conventional mortgage. Some home flippers secure bridge loans while waiting for a conventional mortgage process to be completed.
Home equity loans or lines of credit
A homeowner has the option of using the equity in their home to acquire a loan, which is essentially a second mortgage. The homeowner can also opt for a home equity line of credit, in which they take out the money they need when they need to, and then pay it back in monthly installments.
Traditional mortgages
When a person thinks of traditional mortgages, they tend to think of the standard conventional loans, such as 30-year and 15-year terms. But, there are others that are more ideal types of loans for flipping houses. These include:
- Construction Loans — More ideal for building a house than flipping a house.
- Renovation Loans — Ideal for renovating or performing home improvements on a house already owned. They are very similar to traditional mortgages.
- Cash-Out Refinance — A refinancing loan in which the borrower can qualify based on the equity they have in an existing home and then use the cash to invest in the home they want to flip.
Qualifying for a loan for house flipping
People who are new to the house flipping game may find it difficult at first to be approved for some of the loans detailed above. If they aren’t prepared for extra costs and face unexpected renovation expenses, they could be at risk of defaulting on the loan. They will likely pay higher down payments and mortgage rates in the beginning as well.
In conclusion
Before seeking any type of loan for flipping houses, take the time to research the market. It could also benefit you greatly to speak to someone with house flipping experience to learn more about the pros, cons, and risks associated with each type of loan. Have a plan, and, if possible, have some of your own cash available for the investment, which reduces risk to lenders.