If you are a fix-and-flip investor seeking additional capital to begin your next house flip, you may be considering a fix-and-flip loan from a private hard money lender—and you might be wondering how your credit history could impact your loan approval.
If you have ever applied for a conventional mortgage, you know that a bank's decision to grant a home loan is based heavily on your perceived credit-worthiness. With conventional bank financing, your credit profile, debt-to-income ratio, employment status, finances and tax returns will be scrutinized in detail during the application process, and every aspect of your financial profile will impact the final decision to approve or deny your loan. However, with a fix-and-flip lender, your credit history will not weigh as heavily in the decision to approve your application since the loan will be based more on the value of the property than on your credit score. Depending on the lender, your employment history and tax returns might not be required at all.
Is there a minimum credit score for fix-and-flip loan approval?
Although a fix-and-flip lender will likely have a preferred minimum score for borrower approval, that score will be significantly lower than a conventional bank's. Also, with this type of asset-based lending, if you hold a strong equity position in the property, or if you have several successful flips under your belt, many fix-and-flip lenders will take that into account as well, and may be willing to approve your loan application regardless of your credit score.
What about past bankruptcies?
A past bankruptcy indicates that you have suffered a financial setback in the past, but it does not mean you will default on your loan in the future. Be upfront with your fix-and-flip lender about your past bankruptcy and let them know what you have done to recover from the setback. With many fix-and-flip lenders, a past bankruptcy will not automatically disqualify a loan applicant.
Will a past foreclosure disqualify me?
As with a past bankruptcy, a foreclosure in your credit history indicates to your lender that you have hit financial trouble in the past and were unable to make your loan payment. One up side to this negative event, is that you now have prior experience with the pitfalls that lead to property foreclosure, and with that experience should come wisdom and better preparation for the future. Be honest with your fix-and-flip lender about your past foreclosure, explaining to them what led to the foreclosure, and how your present financial situation, experience and business plan mitigate the risk of default happening again
What financial information will a fix-and-flip lender require?
When determining your loan eligibility, your lender will likely want to review the following items:
- Cash reserves (3 months of bank statements)
- Credit score
- Financial statements
- Tax returns (may be optional—depending on the lender, submitting them may qualify you for lower interest rate)
What Else Will a Fix-and-Flip Lender Ask For?
You should be prepared to discuss with your lender your track record as a fix-and-flip investor. You may be asked the following about your business experience:
- How are you taking title on your investment properties (LLC, LP, S-corp, individual, etc.)
- How long have you been in business?
- How many deals have you transacted in the past 12-18 months?
- What is the average turnaround time on your deals?
- How many projects do you currently have in progress?
- Where are your properties located?
If you’re interested in applying for fix-and-flip financing for your next project, feel free to submit a new deal or contact us with any questions you may have and we’ll do all that we can to help you every step of the way.