How is a Fix-and-Flip Loan Different From a Traditional Home Loan?

House flipping has been taking the real estate world by storm for several years now, and it doesn’t seem to be slowing down anytime soon. If you’re looking to get in on the fix-and-flip trend and are thinking about using borrowed capital to buy and renovate a property, there are several key pieces of information you should know before signing on the dotted line. In fact, there are distinct loans that have been specifically created to fund fix-and-flip investments, and they are quite different than the traditional home mortgages you may have come to know.

What’s a Fix-and-Flip Loan?

For starters, fix-and-flip loans, also known as “hard money loans” or “rehab loans,” are short-term bridge loans specifically intended for the financing of real estate investments. Unlike traditional home mortgages that are issued by banking institutions, fix-and-flip loans are funded by private, direct lenders.

5 Key Differences Between Fix-and-Flip Loans and Traditional Home Loans

1) Funding Speed

The goal of purchasing a fix-and-flip property is to quickly renovate the home and flip it for profit, so time is always of the essence—and that is where the first difference between the two types of loans comes into play. Fix-and-flip loans are fast and flexible. These loans can be approved and funded in as little as 5 to 10 days, whereas a traditional bank loan generally takes 45 to 60 days to close.

The bank’s longer timeline includes an extensive borrower application, strict rules about property condition and a microscopic look at your finances. If anything at all sets off a red flag, a traditional mortgage lender will ask for more documentation, further prolonging the approval process. Securing a traditional home loan rarely takes less than a month, which is like an eternity to a fix-and-flip investor. If auctions, short sales or foreclosure properties are part of your fix-and-flip game plan, be aware that you will compete with buyers who are executing their purchase agreements while you’re waiting weeks to hear back from the bank.

2) Loan Length

While a standard home mortgage is typically amortized over 15 or 30 years, with a fix-and-flip loan you will make monthly interest-only payments for a term of 6 months to two years. Because most fix-and-flip lenders do not charge penalty fees for early payment of the loan, you can pay off the balance as soon as your property sells, and, conversely, if you need more time to complete the flip, many private lenders will offer 3 to 6-month loan extensions for qualified fix-and-flip borrowers.

3) Condition of Your Investment Property

Another important difference between fix-and-flip loans and traditional bank loans is related to the condition of the property being purchased. A conventional mortgage lender will likely have strict requirements regarding the condition of the property, and the loan amount you can qualify for will be limited by your credit-worthiness and the property’s as-is value. For fix-and-flip loans, the as-is condition of the property is irrelevant if there is sufficient after-repair value (ARV) to justify the loan amount. Since the property is being purchased with the intent to fix it up, its condition is often poor—and that is expected by the fix-and-flip lender.

4) Your Credit Score

While a traditional home loan is based heavily on the state of your credit, that is less important to a fix-and-flip lender. A fix-and-flip lender will base its approval decision more on the value of the property than your creditworthiness. Although there will likely be a minimum score a fix-and-flip lender will prefer, with this type of asset-based lending, if you hold a significant equity position in a property, or you have a few successful flips under your belt, many lenders will take that into account and grant a fix-and-flip loan regardless of your credit score.

5) Loan Costs

When you borrow from a traditional mortgage lender, your interest rate will be significantly lower than with a hard money lender, and the origination fee will usually be no more than one or two points (1% to 2% of the loan amount). A fix-and-flip loan will carry a higher percentage rate, and you could be charged two to four (or more) points for the origination fee.

With either type of loan there are several added costs to be aware of in addition to the actual amount of money you’ll be borrowing. These include “holding costs” which is everything you’re responsible for while renovating the property (loan payment, taxes, insurance, utility fees and HOA fees). You’ll also need to bring a down payment to the deal, which will likely be around 15-25% of the amount you are borrowing.

Finally, when it’s time to sell the improved property, with either type of lender you’ll need to pay closing costs, which may also include realtors’ commissions.

Tips Before Getting a Fix-and-Flip Loan:

  • Before applying for a fix-and-flip loan, staying organized is essential. It may be a wise idea to keep a detailed document for each property you’re looking to purchase, with everything from the address to the comparable home prices in the neighborhood noted. Should the lender have any questions throughout the process, you’ll have all your information in one, easy-to-access location.
  • LTV, LTC and ARV are three acronyms to know:
    • LTV, or Loan-to-Value ratio, is the term used by lenders to express the ratio of a loan to the value of the property being purchased.
    • LTC, or Loan-to-Cost ratio, is the term lenders use to express the ratio of a loan to the cost of purchasing and renovating the property.
    • ARV, or After Repair Value, helps investors determine the difference between the as-is value of the home and the value of the property after repairs.
  • Fix-and-flip loans are for non-owner occupied SFR, 2-4 Units and MFR. They are typically available for up to 80% Loan-to-Cost; 6-12 Month Terms; 1.5-4 Origination Points, $50K to $20MM Loan Amount; and 8% to 13% Interest Rates. It’s also important to note that when you are just starting down the fix-and-flip road, traditional home loans will likely not be an option for purchasing investment properties.

If you’re interested in taking the next step into the world of fix-and-flip real estate investing, Anchor Loans is happy to help you get started. We know that this process can feel overwhelming, but it doesn’t have to be. Feel free to contact us with any questions you may have, and we’ll do all that we can to help you every step of the way.