Top 7 Fix and Flip Financing Options

Fix And Flip Financing

How To Get Funding For Flipping Houses

HGTV makes flipping homes look easy, fun and rewarding. While “easy” isn’t how most experienced house flippers describe the process, renovating and selling flipped properties is most definitely fun and rewarding — that is, if you have the financing needed to actually accomplish a flip. And now is a fantastic time to flip homes, regardless of if it’s your first flip or 100th.

In many ways, the housing crash of 2008-2009 seems to be a distant memory, as house flipping has reached its all-time peak in 2019 for many markets, according to ATTOM Data Solutions. A decade of rising home prices, low interest rates and an expanding economy has made fertile ground for those looking to make a quick profit by rehabbing and selling homes quickly.

While the house flipping trade can indeed be lucrative, it requires one thing above all: capital. Much like the traditional home-buying process, investors looking to flip properties need funding for the purchase price of the home, property taxes, utilities and insurance costs until the day the property sells. However, flippers also need money to rapidly rehab the property and prepare it for sale.

To cover those costs, most fix and flip investors need a loan. However, unlike in the pre-2008 era, when it seemed like anyone that could sign their name could get a housing loan, lending standards have tightened up in 2019. Additionally, loan rates are typically higher on a fix and flip loan than a standard mortgage, as lenders view these loans as riskier.

The good news is there’s generally a solution if you’re looking for fix and flip financing, whether you’re a first-time flipper or an experienced veteran with fantastic credit. Here’s a look at the top seven financing options for fix and flip investors, including average rates and tips for success.

First-Time Flippers

How to Get a Fix and Flip Loan for First-Time Flippers

If you’re a first-time flipper, getting a fix and flip loan can be more difficult than if you’re a seasoned professional with outstanding credit and a track record of successful flips. It’s not anything personal — banks are just in the business of balancing risk and reward. If you can’t demonstrate on paper that you’re likely to be able to pay back a loan, no traditional bank will finance you. This is particularly true when it comes to house flipping, as banks prefer to make long-term loans, and a house flip — at least a successful one — is a short-term endeavor. However, there are alternatives out there, such as Seek Business Capital, which actually specializes in helping startups and new business owners get funding and can work with you to get you the financing you need.

How Does It Work?

Both HELOCs and home equity loans can be sources of financing for your fix and flip project, but they work in very different ways.

A HELOC is a true line of credit, rather than a loan. In that sense, it’s more like a credit card backed up by the value of your house. When you need to take money out, it’s there waiting for you, but you’ll owe interest on whatever you draw down. Interest rates on HELOCs are variable, just like with credit cards, so in a rising-rate environment, you could be in for a surprise when it comes to your interest costs.

A home equity loan, on the other hand, is more like a traditional loan, with a fixed interest rate and a specific term. With a home equity loan, you’ll be making regular monthly payments until your loan is paid off in full. You can also refer to a home equity loan as a second mortgage, assuming you’re still paying off your original mortgage.

What Are the Rates?

Home equity line of credit rates, along with home equity loan rates, can be low because you’re using your home as collateral. An additional factor that keeps rates low is the fact that homeowners tend to have decent credit scores, otherwise they wouldn’t qualify for a home mortgage in the first place.

That being said, it’s unlikely that you can get a HELOC or home equity loan rate as low as a traditional, fixed mortgage. Although both of these types of loans are backed by the collateral of your house, a traditional mortgage is a very stable, long-term investment for a bank or finance company. A second mortgage or a home equity line of credit by definition are riskier for lenders, so rates tend to be a bit higher.

As of mid-2019, if you have excellent credit and plenty of equity in your home, you might qualify for a HELOC rate in the mid-4% range, or a home equity in the low-5% range. As with other loans, if you have bad credit — and still qualify for these types of loans — your HELOC rates will climb.

Am I Eligible?

The basic qualification standards that apply to all home mortgages also apply to HELOCs and home equity loans. You’ll need to have a good credit history to obtain a decent HELOC or home equity loan. You can also expect your lender to ask about your employment, income, debts and any other relevant financial information.

An added layer of qualification for a HELOC or home equity loan comes in the status of your existing mortgage. You need to have equity in your home to qualify for either of these types of financing. This means that the amount you owe on your home mortgage must be less than the value of your property.

Net-net, the more equity you have in your home and the better your credit score, the more likely you are to qualify for a HELOC or home equity loan.

How Much Can I Get?

The amount you can qualify for when applying for a HELOC or home equity loan is directly tied to the value of your current property. Typically, a lender will let you borrow as much as 85% of the net equity in your house, which is your home’s value less the remaining balance of your mortgage. For example, if you own a $300,000 home but still have an outstanding mortgage of $200,000, your net equity is $100,000. If you meet home equity loan or home equity line of credit qualifications, you could be financed for up to $85,000.

Most HELOC and home equity loan lenders require a minimum draw amount or financing amount on your HELOC or home equity loan, respectively. For example, if you set up a HELOC with a limit of $300,000, your lender might require your first draw to be at least $25,000.

What Documents Do I Need?

To qualify for a HELOC or a home equity loan, you’ll essentially need the same documentation as if you were applying for a first mortgage on your new home. You’ll need to provide a complete financial picture to your lender, including the following:

• Financial specifics of the house for renovation (e.g., cost, down payment, etc.)
• Pay stubs or other documentation of income
• Two years of tax returns, in some cases
• Credit card, loan and other debt documentation
• Access to your credit report
• Bank statements and evidence of cash reserves
• Evidence of your existing home value, including any outstanding mortgages
• A house flipping business plan, in some cases

As with all types of loans, the higher your credit score and the better the state of your overall finances, the more likely you are to get approved.

What Are the Terms?

In the most basic sense, HELOC terms are like those of a credit card; however, the full picture is a bit more complicated. Typically, a HELOC is broken down into two periods: a draw period and a repayment period. For example, the home equity line of credit terms established by Wells Fargo consist of a 30-year total term, divided into a 10-year draw period and a 20-year repayment period. During the draw period, you can borrow as little or as much as you want, up to your stated limit. Once the repayment period begins, you can no longer draw on that HELOC.

For a home equity loan, your principal and interest payments are usually fixed and begin immediately after you establish your loan.

Experienced Flippers

How to Get a Fix and Flip Loan for Experienced Flippers

If you’re an experienced flipper, you’ll have a lot more options and flexibility when it comes to your financing options. With a track record showing that you can manage to turn a profit and pay back your loans, lenders will be much more interested in financing your projects. As a veteran house flipper, your best options are to finance with big banks and online mortgage companies, as you’re likely to get larger loans with better terms.

How Does It Work?

Experienced flippers usually have access to more established, name brand banks. In one sense, this is a huge benefit. Rates are often lower with well-known banks, and funding can be nearly unlimited if you demonstrate you have the financial capacity to pay back a large loan.

However, with a traditional bank, there’s usually more work involved when it comes to applying for a fix and flip loan. Although you may be able to start the application process online, you’ll no doubt need to speak with a loan officer at the bank to get your funding past the initial stage. Even with a proven track record, fix and flip loans carry inherent risk for lenders, so you’ll have to cover all the financial bases when it comes to getting approved for a loan. This means more work on your end, and slower overall funding times.

With traditional bank and online mortgages, terms are usually either 15 or 30 years. Inherently, this doesn’t match up well with the timeframe of flipping houses. However, bank loans and online mortgages can still work well for experience flippers, particularly those looking to rehab older buildings and rent them out rather than sell them. With an improved home, owners can charge higher rents, in many cases offsetting the long-term mortgage payments.

What Are the Rates?

Rates on traditional mortgage loans remain extremely low, in a historical sense. With good credit and an extensive operating history for your flip business, a large bank may offer you rates as low as about 3% for a 15-year mortgage, or about 3.875% on a 30-year loan. Rates are subject to change dramatically based on current market conditions.

Am I Eligible?

As an experienced and successful house flipper, you’re likely eligible for nearly any type of loan. With a positive track record and (presumably) good credit, you’re usually going to have access to the best rates and loan terms. In fact, if you have a long operating history and rock-solid credit, banks might even compete for your business, offering you enticements or bonuses to choose their loans over others.

Bear in mind, however, that if you’re looking to qualify for a traditional mortgage, both you and the home you’re going to purchase are part of the equation. With a fix and flip loan, lenders expect a property to be in need of a major overhaul; after all, that’s where the “fix” part of “fix and flip” comes in. With a traditional mortgage, however, the property itself generally needs to be in fairly good shape to begin with. Although renovations are certainly allowed, the property needs to be in good enough condition to reduce the risk to the lender, who will have to repossess and sell the property if you default on your loan. Thus, a distressed property could be more difficult to finance using this option. In that case, there may be more financing available if you work with other financial partners or alternative funding options like Seek Business Capital.

Thus, to be eligible for this type of loan, you’ll typically need upper-tier credit in addition to your experience as a house flipper. The property you’re financing should also be in good condition.

How Much Can I Get?

Mortgage approval is based on a complex formula incorporating your income, debt, credit and financial history, interest rates, the price of the property, fees, taxes, and other costs that comprise the total purchase price. Your debt-to-income ratio is one of the key factors, as many lenders won’t extend a loan — even if you have immaculate credit — if your debt payments are more than about 36 percent of your income.

Overall, home mortgages run anywhere from $0 to over $1 million. Ultimately, the size of your mortgage is theoretically only limited by your credit history, financial situation and the cost of the property you’re buying. With a longer-term mortgage, your monthly payments will be lower, so you might qualify for a larger loan than if you choose the 15-year route.

What Documents Do I Need?

To qualify for a more traditional mortgage with a large bank, you’ll need to provide the most documentation out of any type of loan. Documents you should expect to have on hand include:

• Access to your credit score, which should be at least 640, with a score of 720+ being more desirable
• Evidence of cash reserves in savings accounts
• Documentation of prior house flip/renovation projects
• Tax returns
• Financial specifics of the house for renovation (e.g., cost, down payment, etc.)
• Pay stubs or other documentation of income
• Credit card, loan, and other debt documentation
• Bank statements
• A house flipping business plan, in some cases

If you’re trying to qualify for a loan as an experienced house flipper, you’ll have to demonstrate this in writing. Although even one successful flip might be enough to qualify you for a new loan, the longer your history of successful house flips, the more that works in your favor in terms of rates and terms.

What Are the Terms?

Traditionally, large banks and online mortgage lenders offer 15- and 30-year mortgages. This makes them best-suited for long-term projects, such as renovations and rentals. You can still use them for flip projects, but you might have to negotiate terms that allow you to prepay your mortgage without penalty or having to pay all the interest attached to it.

Depending on your credit and operating history, it may also be possible to negotiate a shorter term with particular lenders. Of course, changing the terms of any standard housing loan alter the risks for the lender. The lowest available rates are likely to be found on a standard 30-year mortgage, and shortening or otherwise making these terms more flexible can increase your interest costs.

$0 Down

How to Get a Fix and Flip Loan for $0 Down

In a perfect world, you wouldn’t have to risk any of your capital to invest in a fix and flip property. You could just sign some paperwork, rehab the property, sell it at a profit and pay off your loan. For some borrowers, this “perfect world” does exist, in the form of a $0 down loan.

With a $0 down loan, you can put all of your capital into the actual “fix” part of your fix and flip. Since you’re not using money out of your own pocket, the financial risk to you is lower than if you have to commit your own capital to a large down payment. Of course, with $0 down, this risk is transferred to your lender. When a lender has to take on more risk, this can impact both the approval of your loan and the terms you receive. In other words, you’re not likely to get a traditional housing loan to finance a $0 down fix and flip. In this case, a personal loan can often be your best option.

How Does It Work?

Personal loans can be a great financing option because they are so flexible. Most personal loans are unsecured, meaning they aren’t tied to any particular collateral — such as the house you’re going to buy and flip. These types of loans can generally be used for any purpose whatsoever, from a down payment to the costs of insurance or home improvements. Some lenders will ask what you intend to use the money for, but most legitimate needs, including a fix and flip investment, won’t raise any red flags. And since financial services has become such a competitive field, particularly with the rise of online banks, there are more outlets than ever to find a personal loan.

Another big plus is that personal loans are often simple to get, at least in terms of the paperwork involved. In many instances, you can get approved online and funded within a few days if you have good credit.

What Are the Rates?

Since a typical personal loan doesn’t require collateral, lenders are taking more risk than they would with say a car loan, which gives them property to repossess in the instance that the borrower defaults on the loan. With an unsecured personal loan, your promise is essentially the only guarantee a lender gets that you will pay back your loan. Thus, rates for personal loans are generally higher than you can get with a straight mortgage. However, they’re often much better than you could get from alternative lending sources, such as a hard money or subprime lender.

With no collateral, your rate for a personal loan will be highly dependent on your personal credit. You can expect rates between as low as about 5.99% on a personal loan if you’ve got top-tier credit. Rates can climb dramatically, however, if your credit is poor, in many cases reaching double digits.

Am I Eligible?

Eligibility for a personal loan can be a bit tricky. Many lenders are all-too-eager to provide you with a personal loan, but by the time you get through the application process, you’ll find you’ve been approved — but with an interest rate of 20% or higher. At those rates, lenders can afford to aggressively make loans, because they’ll earn more than enough interest at those rates to compensate for any borrowers that may default.

The key to successfully getting a good personal loan is to have your personal credit in order. With top-tier credit, you can likely qualify for a personal loan in the mid-single digits. The good news is that in many ways, a personal loan is a perfect option for a $0 down buyer, primarily because you won’t need to put up a large down payment to qualify for a personal loan. You also won’t have to worry about the loan-to-value ratio in the property you are buying. As long as your credit is in order, you’re likely to get approved for a personal loan. This makes a personal loan one of the most flexible financing options for a fix and flip loan.

How Much Can I Get?

Personal loans are among the most flexible financing options you can find, and that applies to loans amounts, too. If you’re looking for a large amount of capital, a personal loan might be a choice option. In an optimal financial situation, you may be able to find a personal loan for $500,000 or more. Of course, those lofty loan amounts are only available to those who can demonstrate an iron-clad ability to pay all of that money back. And if you have the perfect credit, high cash reserves and sparkling operating history that would be needed to qualify you for such a large loan, you’re likely to find better or cheaper loan options with other types of financing.

For the more traditional $0 down borrower, however, loan amounts in the tens of thousands or even more are not unusual. The key to everything is your lender’s assessment of your ability to pay the loan back, which is based on your personal credit history.

What Documents Do I Need?

Since personal loan rates are so highly dependent on your personal credit score, the better your credit history, the better off you’ll be. One of the advantages of a personal loan is that you can often apply for it online, reducing your document requirements. With some banks, all you’ll need to do is provide personal identifying information, such as your name, address and Social Security number, which is used to provide access to your credit report. You can have a nearly instantaneous response.

If your credit is less than stellar, however, you might consider going into a brick-and-mortar bank with some additional information to make your case for a loan. In that case, the more documentation you can bring, the better, including the following:

• Pay stubs or other documentation of income
• Two years of tax returns
• Credit card, loan and other debt documentation
• Access to your credit report
• Bank statements and evidence of cash reserves
• Evidence of any experience in the industry, such as being a contractor, if applicable
• A house flipping business plan, in some cases

Regardless of which path you choose, you might still want to go through the online application process first. That way, you at least have a baseline as to the types of rates you might qualify for.

What Are the Terms?

Terms for personal loans are typically pretty flexible. You’ll have a fixed interest rate for a set time period that usually runs from between one and five years. If you’re using a personal loan for a fix and flip, it’s important to get a loan that has no penalty for early repayment. Ideally, you’re going to use the money from the personal loan, fix and flip your house and then rapidly pay off your loan. In that scenario, the last thing you want is to be saddled with extra fees and interest for prepayment, as they will cut into your profits.

Bad Credit

How to Get a Fix and Flip Loan With Bad Credit

Without good credit, it can be hard to get a fix and flip loan at a reasonable interest rate. However, this doesn’t mean that you won’t be able to get financing. Remember, in the world of finance, lenders have to balance out risk and return. If you’re looking for a bad credit fix and flip loan, your lender will have to charge you a higher interest rate as compensation for the higher risk of nonpayment.

With bad credit, you can probably give up the idea of getting financed by a top-tier national bank, but there are plenty of subprime lenders that actually focus on bad credit borrowers. Another popular option among house-flippers is what’s known as a hard money loan, which are high-cost, asset-based loans.

How Does It Work?

If you have bad credit, you’re what’s known as a subprime borrower. This isn’t a personal judgment, just a category that indicates you’re a higher risk for lenders. Since this can be a profitable area for lenders, due to the higher rates they charge, there are plenty of subprime lenders available for you to choose from. The loan application process is the same as with any other type of loan, you’ll just have to be prepared to pay higher fees and/or interest rates.

If you go the hard money loan route, you’ll deal with private lenders rather than a traditional, big-name bank. The good thing about a hard money loan is that your creditworthiness is not the prime criterion for you getting a loan. Rather, the value of the property you’re going to fix and flips is the determining factor. This can make a hard money loan a good option for those that can’t qualify for traditional or even subprime loans.

What Are the Rates?

You can expect rates for subprime loans to be high, particularly for fix and flip loans. Whereas prime lenders might be able to get a loan in the 3% range, a subprime fix and flip loan for a borrower with bad credit is more likely to approach 10%.

Subprime loans often have additional requirements, such as the requirement of more money down. For many borrowers with bad credit, this can be a tough hurdle to overcome, as cash flow is often tight for those with lower-tier credit. Be sure to do all of the math to make sure you can still make money on your flip even with the high cost of your financing.

Hard money loan rates are often higher than even subprime rates. Hard money lenders understand that only borrowers with low credit scores generally turn to them for money; thus, they can set high rates because they know that these types of borrowers might have no other options when it comes to getting a loan.

Packaged all together, a fix and flip loan for someone with bad credit is likely to be extremely expensive. If a subprime or hard money loan is your only option to finance your fix and flip loan, be extra sure that the math works out in your favor and that you can still keep your fix and flip profitable.

Am I Eligible?

In one sense, it’s easy to be eligible for bad credit financing, because you don’t need a high credit score to qualify. This is particularly true in the case of a hard money loan, in which case your credit score is not the most critical factor — what you’ll need more than anything is a property you’re willing to put up for collateral. Of course, with either type of loan, you pay the price in terms of higher costs.

One caveat with subprime loans in particular is that many lenders offer variable rate loans in an effort to entice more borrowers. These types of loans often start with low “teaser” rates that may run in the mid-single digits but can jump dramatically after a certain time period of if market interest rates rise. Be sure to understand all of the fine print of a subprime or hard money loan to ensure you don’t get tripped up by a rising interest rate.

In a perfect world, you’d want to qualify for a higher tier of borrowing so that your loan is more affordable. If you’re shopping for a loan and find that your only options seem to be subprime or hard money options, it might be worth it to take a few months to work on improving your credit. Making all of your payments on time, reducing your amount of outstanding debt and keeping your credit utilization low are all ways to raise your score and qualify for a better loan. With a little effort, you might be able to knock down the costs of your fix and flip loan.

How Much Can I Get?

When dealing with a subprime or hard money loan, it’s best to not overreach. Since financing is expensive in this category, the less you can borrow, the better, even if you qualify for a loan with a high-dollar limit. If you don’t have good credit, it means you don’t have experience with successfully paying back loans yet, so you don’t want to jump in the deep end of the pool without understanding the process first.

When it comes to hard money loans, the amount of your loan is typically limited to 70 percent of your “after-repair value,” or ARV. This is an important term for house flippers to understand. ARV is the estimated value of the property after repairs have been made, which essentially is a projection of the home’s value once your flip is complete. This number is important because it allows house flippers to estimate their potential profits, which can make budgeting for costs and loan payments far easier and more accurate. With a subprime loan, the better the financial picture you can present to a bank, the better the offer you’re likely to get so presenting your estimated ARV is a critical part of the loan process.

When applying for any loan with bad credit, you’re starting the process with one strike against you, so you’ll likely have to show cash reserves and be willing to put up a larger down payment to get a loan with reasonable rates and terms. The amount you can borrow will vary from lender to lender based on their underwriting standards; however, you shouldn’t expect to be able to borrow millions of dollars for a fix and flip loan if you have bad credit.

What Documents Do I Need?

Subprime loans have more forgiving underwriting standards, but you’ll still be expected to provide the basic documentation required to apply for any loan, including the following:

• Financial specifics of the house for renovation (e.g., cost, down payment, etc.)
• Pay stubs or other documentation of income
• Two years of tax returns
• Credit card, loan and other debt documentation
• Access to your credit report
• Bank statements and evidence of cash reserves
• Evidence of any experience in the industry, such as being a contractor, if applicable
• A house flipping business plan

These documents don’t guarantee approval, but they will be used by your lender to paint a current picture of your finances. By their very nature, subprime and hard money lenders expect to see a less-than-stellar credit history, so you shouldn’t worry too much that you don’t have top-tier credit.

If your financial situation improves over time, you should submit new documents to see if you can refinance your existing subprime or hard money loan at a better rate, or take out a new loan with a lower interest rate.

What Are the Terms?

A fix and flip loan by its nature is generally short term. As a bad credit borrower, you might see an even shorter term, as longer-term subprime and hard money loans are risky for lenders.

In that sense, both lenders and borrowers are in agreement about the terms of subprime and hard money loans — they both want as short a term as possible. As a borrower, it should be your objective to get out of your fix and flip loan as soon as possible, especially with a subprime or hard money loan. The high interest rates on these types of loans will eat into the potential profits of your flip, as the longer you’re paying interest on your loan, the less money you’re making on your investment.

You may not have a lot of flexibility when it comes to subprime or hard money loan terms, but if possible, it’s best to find a loan with no prepayment penalty. This way you can pay off your loan early, as soon as you receive the proceeds from your flip, thereby avoiding additional interest charges.

Fair Credit

How to Get a Fix and Flip Loan With Fair Credit

With fair credit, you’re in the middle ground between borrowers with solid credit, who can practically name their own loan terms, and subprime borrowers, who will face high interest rates if they even get approved for a loan at all. With fair credit, you’re likely to get approved for a fix and flip loan, but you’ll have to do some work to get one with good terms. One option flexible, low-cost option that’s often overlooked by many borrowers is taking out a 401k refinancing loan.

How Does It Work?

A 401k refinancing can be a viable option if you’re in mid-life with a sizeable 401k balance. If you’re too young, you probably don’t have enough in your retirement account for this strategy to work. If you’re too close to retirement, you don’t want to jeopardize your future well-being by drawing down your retirement funds. However, in the sweet spot, a 401k refinance can make sense.

Under this strategy, you’ll take a loan out of your 401k, pay for your fix and flip, and then pay off your 401k loan. Under IRS rules, you can borrow up to 50 percent of the value of your 401k or $50,000, whichever is less, as long as your employer allows 401k loans. The IRS also limits the term of 401k loans to five years, unless you’re using the money to purchase your primary residence. As with most loans, a 401k loan has a set term and a fixed interest rate. But the beauty of the 401k loan is that you pay the interest back into your own account. Payments are typically deducted from your paycheck automatically by your employer.

What Are the Rates?

Rates on 401k plan loans are set by individual employers. A common interest rate is the current prime rate plus one percent. As of mid-2019, the prime rate was 5.5%, according to the Federal Reserve Bank of St. Louis, so you may be able to get a 401k loan for about 6.5%. This rate is above current home mortgage rates but in the ballpark of what you might receive on a personal loan if you have good credit.

Remember, 401k loan rates are not connected to your personal credit score, so loan rates will be the same across an entire company. Your 401k administrator will be able to tell you what the current 401k loan rates are.

Am I Eligible?

One of the main benefits of a 401k loan as a financing option is that you don’t really have to “qualify.” Yes, your employer needs to allow 401k loans, and yes, you need to comply with IRS rules when it comes to the $50,000 limit and the five-year maximum term. But unlike almost any other type of loan, you don’t need to prove financial viability since you’re borrowing your own money. You don’t need a good credit score, a low loan-to-value or debt-to-income ratio, or high cash reserves. All you need is a 401k balance and a willing employer.

One cautionary note is that within the general IRS rules, employers are free to set their own terms when it comes to 401k plan loans. Some employers require a specific reason to allow a loan, and those reasons typically fall under the “hardship” category. For example, an employer may only allow 401k loans to prevent eviction, to buy a primary residence, or to pay for educational or medical expenses. Check with your 401k plan administrator as to any eligibility restrictions before you apply for a 401k loan.

How Much Can I Get?

The IRS sets the maximum limit on 401k loans at the lesser of $50,000 or one-half of your account balance. Individual employers have the right to restrict loans to lesser amounts, so you should consult with your 401k administrator before you decide to go this route.

If you’re looking for the maximum loan amount of $50,000, you’ll therefore need at least $100,000 in your 401k account. You aren’t required to borrow the maximum allowable amount when you take out a 401k loan. For example, if you only need a $20,000 loan and you have $50,000 in your 401k, you can borrow just the $20,000, which is 40 percent of your balance.

What Documents Do I Need?

As noted above, a 401k loan is unlike other types of financing in that it doesn’t require any special type of qualification. You won’t need to present your credit history or bank statements to get a 401k loan. However, your employer will still need some basic documentation. Typically, you’ll just need to fill out an application that indicates the amount you’ll need and how you want the money to be disbursed. Once you review the paperwork and agree to the terms, you’ll likely be approved. Your loan may be rejected if you already have one 401k loan and the new loan will put you over the maximum.

What Are the Terms?

Most 401k loans are structured like a traditional term loan, with a fixed interest rate and a term of no longer than five years. Payments are made monthly, typically via automatic payroll deduction. Most 401k loans don’t have a prepayment penalty, but you’ll have to check with your 401k administrator.

One important caveat when it comes to 401k loans is that if you leave your job, your outstanding balance will typically become due immediately. You’ll usually be granted a grace period of 30 to 60 days, but you’ll have to get your entire loan balance back into your account rapidly. If you fail, your loan will be considered a distribution. This means you’ll owe income tax on the entire outstanding balance, and if you’re under age 59 ½, you’ll likely owe an additional 10% early withdrawal penalty, according to the IRS.

Another thing to bear in mind is that the terms set forth by the IRS for 401k loans limit the maximum to $50,000, regardless of how much money you’ve got in your account. This can limit the effectiveness of this financing option for many fix and flip loans, as $50,000 doesn’t always go a long way in that industry. However, it can be a good option if combined with other types of financing if you need more than $50,000.

Good to Excellent Credit

How to Get a Fix and Flip Loan With Good to Excellent Credit

If you’ve got good or excellent credit, you’re in the catbird seat when it comes to fix and flip loan financing. You’ll likely have your choice of lenders to borrow from, so you can compare rates and terms and even play lenders off one another to get the best possible loan. With a strong credit score, even the biggest banks are likely to offer you a good fix and flip loan.

If you’ve got good to excellent credit and existing properties, a cash-out refinancing loan might be another viable financing option.

How Does It Work?

As discussed above, a fix and flip loan is riskier than the average loan for a lender. However, if you’ve got good to excellent credit, this risk is mitigated. In most cases, you should be able to snag a good loan. As with any other type of borrower, you’ll have to present a picture of your current finances and your financial history. But for the most part, if you’ve got solid credit, documenting your finances will be a mere formality in terms of qualifying for a loan.

If you’ve got existing properties, you’ve got even more financing options available to you. The built-up equity that is locked into your properties can become a source of additional financing for your new fix and flip via a cash-out refinance.

A cash-out refinance pays off the loan on your existing property and provides you with additional money based on the equity you have in that property. You can then take that money to pay for your new fix and flip. Essentially, you’re transferring the equity in your existing property into a source of liquid cash for your fix and flip.

Whichever course you take — straight loan or cash-out refinancing — even with top-tier credit, you’ll want to clean up any potentially questionable areas in your credit history and make sure you’ve got adequate cash reserves at the time you apply for your loan. It might be a good idea to wait to make big purchases for your new flip, for example, until you’ve already gotten approved for your loan. Although good credit goes a long way towards getting a loan, the better your financial outlook, the lower the interest rate you can snag.

What Are the Rates?

As a borrower with good to excellent credit, you should expect to get the best cash-out refinance rates available from any particular lender. In the current environment, that might be a rate in the low 3% range. The specific rate you receive will depend on a number of specifics determined by your lender. For example, some may ask for a larger down payment to get the absolute best rates, while others might want you to demonstrate a past history of successful flips.

Am I Eligible?

In a word, yes. If you’ve really got excellent credit, you won’t have a problem qualifying for a fix and flip loan. However, remember that “excellent credit,” from the perspective of a bank, involves more than a high credit score. Although scores above 720 will usually get you the best rates, lenders will also want to look at additional factors, such as your operating history (if any), your cash reserves and how you manage your other debt.

For cash-out refinancing qualifications, in addition to having outstanding credit, you’ll need to have ample equity in your existing property to make the process viable. Owing $99,000 on a home worth $100,000, for example, only give you net equity of $1,000, which is obviously inadequate for cash-out refinancing.

How Much Can I Get?

With good to excellent credit, you’re likely to get as large a loan as you need. Of course, the upper limit is always based on the value of the property you are going to flip, which it can never exceed. Many lenders use a 90 percent loan-to-value ratio, or LTV, to define the upper limit of a housing loan.

Fix and flip loans can be a little different however. Since by definition the borrower is going to put money into the property and — at least theoretically — make it more valuable, some lenders use loan-to-ARV (after-repair value), with an upper cap of 70 percent. Thus, if you intend to flip a home worth $100,000 and turn it into a property worth $140,000, you might expect the top of your loan range to be somewhere between $90,000 and $98,000, depending on the type of lender you’re working with.

What Documents Do I Need?

You might be aware you have good or excellent credit, but your lender won’t just take your word for it. Lenders need to see that information in black and white. You’ll need to bring all of the documentation of your good credit when you meet with a lender, including the following:

• Financial specifics of the house for renovation (e.g., cost, down payment, etc.)
• Pay stubs or other documentation of income
• Two years of tax returns, in some cases
• Credit card, loan and other debt documentation
• Access to your credit report
• Bank statements and evidence of cash reserves
• A house flipping business plan, in some cases
• Any additional evidence to support your claims of good credit

Remember, the more positives you can present, the lower your interest rate is likely to be.

What Are the Terms?

Terms for borrowers with good-to-excellent credit can be very favorable. If you’re going with a standard loan, you can likely negotiate whatever type of term you would like. For a fix and flip loan, you should be looking for a loan that gives you low rates but also allows you the flexibility to pay it off with no prepayment penalties.

With a cash-out refinance, you’re essentially restructuring your existing mortgage loan into a new one. Your goal should be to cash-out refinance terms that include a rate that’s equal to or lower than your existing property loan.

Existing Homeowners

How to Get a Fix and Flip Loan for Existing Homeowners

If you already own a home, you can tap the equity in that house to provide financing for your fix and flip project. This can be an ideal way for an investor to obtain a fix and flip loan, since you’re effectively untapping the hidden value of your home and using it as a source of financing. Of course, the downside is that if you take too much risk using your home equity, you run the chance of losing your primary residence.

The two main ways to use the value of your house to get fix and flip financing are a straight home equity loan, or HEL or a home equity line of credit, also known as a HELOC.

How Does It Work?

Both HELOCs and home equity loans can be sources of financing for your fix and flip project, but they work in very different ways.

A HELOC is a true line of credit, rather than a loan. In that sense, it’s more like a credit card backed up by the value of your house. When you need to take money out, it’s there waiting for you, but you’ll owe interest on whatever you draw down. Interest rates on HELOCs are variable, just like with credit cards, so in a rising-rate environment, you could be in for a surprise when it comes to your interest costs.

A home equity loan, on the other hand, is more like a traditional loan, with a fixed interest rate and a specific term. With a home equity loan, you’ll be making regular monthly payments until your loan is paid off in full. You can also refer to a home equity loan as a second mortgage, assuming you’re still paying off your original mortgage.

What Are the Rates?

Home equity line of credit rates, along with home equity loan rates, can be low because you’re using your home as collateral. An additional factor that keeps rates low is the fact that homeowners tend to have decent credit scores, otherwise they wouldn’t qualify for a home mortgage in the first place.

That being said, it’s unlikely that you can get a HELOC or home equity loan rate as low as a traditional, fixed mortgage. Although both of these types of loans are backed by the collateral of your house, a traditional mortgage is a very stable, long-term investment for a bank or finance company. A second mortgage or a home equity line of credit by definition are riskier for lenders, so rates tend to be a bit higher.

As of mid-2019, if you have excellent credit and plenty of equity in your home, you might qualify for a HELOC rate in the mid-4% range, or a home equity in the low-5% range. As with other loans, if you have bad credit — and still qualify for these types of loans — your HELOC rates will climb.

Am I Eligible?

The basic qualification standards that apply to all home mortgages also apply to HELOCs and home equity loans. You’ll need to have a good credit history to obtain a decent HELOC or home equity loan. You can also expect your lender to ask about your employment, income, debts and any other relevant financial information.

An added layer of qualification for a HELOC or home equity loan comes in the status of your existing mortgage. You need to have equity in your home to qualify for either of these types of financing. This means that the amount you owe on your home mortgage must be less than the value of your property.

Net-net, the more equity you have in your home and the better your credit score, the more likely you are to qualify for a HELOC or home equity loan.

How Much Can I Get?

The amount you can qualify for when applying for a HELOC or home equity loan is directly tied to the value of your current property. Typically, a lender will let you borrow as much as 85% of the net equity in your house, which is your home’s value less the remaining balance of your mortgage. For example, if you own a $300,000 home but still have an outstanding mortgage of $200,000, your net equity is $100,000. If you meet home equity loan or home equity line of credit qualifications, you could be financed for up to $85,000.

Most HELOC and home equity loan lenders require a minimum draw amount or financing amount on your HELOC or home equity loan, respectively. For example, if you set up a HELOC with a limit of $300,000, your lender might require your first draw to be at least $25,000.

What Documents Do I Need?

To qualify for a HELOC or a home equity loan, you’ll essentially need the same documentation as if you were applying for a first mortgage on your new home. You’ll need to provide a complete financial picture to your lender, including the following:

• Financial specifics of the house for renovation (e.g., cost, down payment, etc.)
• Pay stubs or other documentation of income
• Two years of tax returns, in some cases
• Credit card, loan and other debt documentation
• Access to your credit report
• Bank statements and evidence of cash reserves
• Evidence of your existing home value, including any outstanding mortgages
• A house flipping business plan, in some cases

As with all types of loans, the higher your credit score and the better the state of your overall finances, the more likely you are to get approved.

What Are the Terms?

In the most basic sense, HELOC terms are like those of a credit card; however, the full picture is a bit more complicated. Typically, a HELOC is broken down into two periods: a draw period and a repayment period. For example, the home equity line of credit terms established by Wells Fargo consist of a 30-year total term, divided into a 10-year draw period and a 20-year repayment period. During the draw period, you can borrow as little or as much as you want, up to your stated limit. Once the repayment period begins, you can no longer draw on that HELOC.

For a home equity loan, your principal and interest payments are usually fixed and begin immediately after you establish your loan.

FAQs

Frequently Asked Questions About Fix And Flip Financing

Flipping houses can bring up a lot of complicated questions so it’s important to do your research. To help, we’ve answered some of the most common questions new or aspiring house flippers ask, especially those related to financing, which can be some of the most critical and confusing questions you’ll ask in the entire process.