Fix and Flip Loans: What They Are & Your Best Options

Home renovations and home flipping are quick, effective, and powerful ways to earn a solid profit in the real estate game. Unless an investor already has funds saved for a cash purchase of a property, they’re likely going to need help with the upfront costs of buying. Reputable financial services like Trio Capital offer investors fix and flip loans, a type of short-term loan that’s perfect for home renovations or other quick projects. Here’s everything to know about fix and flip loans when investing in real estate.

A fix and flip loan, also known as a short-term bridge loan, allows investors to borrow money with a payback period of 12 to 18 months. When qualifying for this type of loan, lenders review an investment property’s purchase price and after-repair value to determine the amount of loan that a candidate qualifies for. Loans can cover up to 90% of a property’s purchase price, although interest rates are typically higher.

When applying to fix and flip loans in Philadelphia, buyers should follow a few guidelines. Much like applying for a regular mortgage, buyers who have a higher credit score are more likely to qualify for a loan. Ideally, buyers should save a down payment between 20-25%, although many lenders don’t require this to qualify. As always, it’s essential to compare different lenders to find the best terms, annual percentage rates, and amounts.

Lenders, including banks, credit unions, and specialty lenders or brokers, will require documentation from candidates when evaluating their qualifications. These include tax returns dating back to two years, three years of business financial records (if applicable), and a business plan when flipping a home. Then, investors can submit their loan applications.

A fix and flip loan can be a great short-term solution to financial needs, but it does come with some risks. On the positive side, these loans are quick, flexible, and easier to manage for their lower, interest-only monthly payments. Since they’re short-term, most private lenders don’t charge buyers for paying off the loan early. Depending on the lender, these loans also get approved quicker and may not require a home appraisal to finalize.

However, there are some obstacles to be aware of. Since these loans are seen as higher risk, they’re more challenging to qualify for. First-time borrowers, in particular, may face higher interest rates, which can be costly if the renovation or home flip isn’t successful. Borrowers also need to thoroughly research before applying for a fix and flip loan, as some loans are limited to certain properties and projects.

There are several types of fix and flip loans for borrowers to choose from, each with their own advantages and requirements. Check out the options below, and research local lenders to find the best choice for your unique situation.

Borrowers who have plenty of home equity built up in their primary residence can take out a type of secondary mortgage called a home equity line of credit (HELOC). HELOCs require borrowers to have 15-20% of home equity in their property and allow buyers to use up to 90% of their existing equity towards another project.

Since the loan size depends on a borrower’s savings, loan amounts widely vary. A main perk of a HELOC is that it allows investors to tap into what they need whenever they need it. However, the application process is more time-consuming, and finalization requires a home appraisal.

Another option that’s attainable for beginner home flippers or borrowers with poor credit is a hard money loan. The money for these loans comes from a buyer’s collateral, such as real estate or other assets. Another major advantage is that these loans free up money quickly, providing borrowers with funds as soon as one to two weeks.

Hard money loans can be used for traditional home renovation projects as well as for home flipping when a property is already mortgaged. However, borrowing rates are typically much higher for these loans compared to other options.

Home flipping pros with an established business can use a business line of credit to finance their renovation projects. Lenders look at a borrower’s credit score, business experience, and business finances when determining eligibility. These loans are very flexible and allow borrowers to access exactly what they need. Interest is only charged to the amount a borrower uses, which allows for convenient planning in home renovations.

The main advantage of conventional loans is a lower interest rate, which can range between 3-7%. This may be well worth it for investors who can meet its stricter qualifications. Candidates must save up collateral, have a high credit score, or have an established relationship with a bank or credit union. These loans can take 30 days to disburse funds, which may put pressure on a quick project.

Borrowers interested in rehabilitating their primary residence may qualify for a 203(k) loan. These loans are provided by the Federal Housing Administration (FHA) and can be used to fund materials, labor, or refinancing a property. Although investors can’t use these, they’re a great resource for a regular homeowner.

Younger home flippers whose retirement plan allows loans may consider a 401(k) loan when paying for a real estate project. This is when a borrower takes out a portion of their retirement funds to use towards something else. Depending on which is less, buyers can take up to $50,000 or 50% of their balance when applying for the loan. A major risk of 410(k) loans is losing retirement funds in a failed renovation.  

Investors have many fix and flip loan options available to them when planning out their next home renovation, and it’s essential to consult a professional to guide you toward making wide financial moves. Trio Capital offers top-notch guidance, competitive rates, and streamlined access to financing. There’s no experience required, no minimum FICO, and a 2-28 day closing time. When you’re ready to start your next home improvement project, contact the Trio Capital team for expert guidance.