Loans For Flipping Houses

Key Takeaways

  • Although house flipping remains a popular exit strategy for investors, it is important to understand that it is an expensive endeavor that requires careful planning.
  • Getting a traditional mortgage loan to flip a house can be challenging, due to stringent qualifications and long approval timelines.
  • There are a variety of alternative loan options that can help investors finance a house flip.

Stringent eligibility requirements, coupled with expensive purchase and renovation costs, can make it challenging to obtain loans for flipping houses. However, a traditional mortgage loan is not necessarily the most practical way to finance a house flip. Continue reading to find out why obtaining a mortgage to flip a house can be tricky for some, and how creative financing might be a favorable solution to getting a loan to flip a house.

Introduction To Financing A House Flip

According to Attom Data Solutions, there were over 207,000 properties flipped last year, reaching an all-time high since the market crash of 2007. Steady increases in home prices, coupled with limited inventory, have created an environment that allows successful house flippers to earn strong profits. Although house flipping can be lucrative for some, it is nevertheless an expensive endeavor that requires careful planning.

Financing a house flip not only includes the cost of purchasing a property, but also the cost of taxes, utilities, labor and mortgage payments that must be made throughout the renovation and re-selling timeline. For beginner investors, not having enough cash can prove to be a tricky barrier to entry. Having a weak credit score, not having enough income, or not having previous experience are other common challenges that can preclude novices from obtaining loans for flipping houses. New investors, in particular, should consider these costs and potential barriers when applying for loans to flip houses.


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How to get a loan to flip a house

Can I Get A Mortgage To Flip A House?

An individual can get a mortgage to flip a house, but typically only under certain circumstances. An investor might choose to finance a house flip with a traditional mortgage if they have enough cash assets to be used as collateral, or if they have enough equity in an existing property that can be leveraged. Owner-occupants, or those who plan to flip a house while occupying the property for an extended period of time, can also qualify for certain types of mortgages. Many investors, however, will find that they do not fall under such circumstances. Furthermore, a traditional mortgage loan is not necessarily the most practical method of financing a house flip.

A traditional mortgage for flipping a house can be slow to close, making it difficult for investors to pounce on properties that move off the market quickly, such as foreclosures or short sales. In addition, banks typically evaluate a property’s current value, including existing problems, before issuing a loan estimate. Those applying for a mortgage loan may find that the loan to value (LTV) ratio determined by the lender may not be sufficient to cover the cost of improvements. These impracticalities, combined with qualification barriers, make it difficult for house flippers to obtain mortgages. Luckily, a variety of flipping houses financing options have become available over the years. Read on to discover the various options available to house flippers today.

How To Get A Loan To Flip A House

The rise in alternative financing options has made it possible for a variety of investors to flip houses, without having to rely on traditional mortgage loans. Because mortgage products from conventional lending institutions often have stringent eligibility requirements, and can be impractical for an investor’s desired timeline, an increasing proportion of investors have relied on alternative methods to finance a house flip. The following provides an overview of some of the most popular home loans for flipping houses today:

  • Hard Money Loan: Hard money loans are ideal for house flippers who have a short timeline to fix and flip a property, such as one year. These types of loans typically have lower eligibility requirements relative to traditional mortgages, as well as a faster approval timeline, in exchange for a higher interest rate.

  • Cash Out Refinance Loan: For an investor who has built up enough equity in an existing investment property, such as between 30 or 40 percent, the opportunity to take out a cash out refinance loan is a real possibility. Investors essentially take out equity from the existing property, in the form of a new loan, so that they may purchase and flip a second property.

  • Home Equity Line Of Credit: A home equity line of credit (HELOC) works similarly to the cash out refinance loan, but a differentiating factor is that the equity is pulled from the investor’s primary residence, of which they must be an occupant. This strategy may work well for investors who opt to live in properties while they renovate them.

  • Private Money Loan: A private money loan is basically a fancy way of saying “borrowing money to flip a house.” Every investor should understand the importance of networking, and maintaining their professional network, in order to increase their chances of encountering private money lenders. In a private money loan, the house flipper and the financial investor will work out and put their agreed-upon terms under contract.

  • Joint Partnership: A joint partnership is a great way for a beginner investor to get into the house flipping business. A partner might be someone who is willing to put up the financing for a property, someone who is willing to trade their knowledge and expertise in exchange for grunt work, or a little bit of both. In a joint partnership, the partners will typically agree to share profits once the property is sold.

  • FHA Loan: The Federal Housing Administration (FHA) offers a housing loan program to back buyers who have less than perfect credit and financial status. In addition, the FHA 203K home improvement loan allows buyers to borrow enough funds to both purchase and renovate an old or distressed property. Buyers should keep in mind that FHA and 203K loans are intended for owner-occupant properties.

  • VA Loan: The U.S. Department of Veteran Affairs will guarantee a part of a home loan, in order to assist active-duty military, veterans and spouses in purchasing property regardless of credit or financial standing.

Summary

Loans for flipping houses are not necessarily hard to come by, if investors know what types of loans to look for. House flipping has reached all-time highs since the market crash of 2007, partially due to favorable factors such as increasing home prices and limited inventories. However, investors are faced with the big question of how to go about financing a house flip, especially when traditional mortgage loans can be both impractical and difficult to obtain. Luckily, there is a great variety of alternative financing options available. It is up to the investor to select the option that makes the most sense for them.

If you were to flip a house, which of the above loans to flip houses would you select? Feel free to discuss in the section below:

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