FIX-and-FLIP Mortgages
In this article, we will cover fix-and-flip mortgages for real estate investors. Fix-and-flip mortgages are non-QM mortgage loans offered at Non-QM Mortgage Brokers on investment and rental properties for real estate properties. Fix-and-flip mortgages are short-term acquisition and construction loans for real estate developers and investors looking to purchase, renovate, and sell residential and investment properties.
Fixing and flipping are when an investor purchases a property, remodels the property to add value, and then (typically) lists it on an MLS to sell to an end user.
Fix-and-flip real estate investors are short-term investors looking for a quick profit from renovation fixer-uppers. Some real estate investors will purchase a fixer-upper and flip it without doing any work for a quick profit. Non-QM Mortgage Brokers are experts in fix-and-flip mortgages for real estate investors.
What Are Fix-and-Flip Mortgages?
Flipping houses can be a very profitable venture when you do it. However, the problem is getting the funds to get started. The truth is that conventional mortgages are largely designed for long-term residences, thereby making them unideal to finance home flipping.
Fix-and-flip is the strategy of purchasing a property, renovating it, then selling it at a profit. Investors typically buy a property at a discount because of its condition.
As flipping became popular among investors and increasingly interested, a new loan product was needed. And indeed, the fix-and-flip mortgages were created as a result. This article will tell you more about this loan product, its types, benefits, and how you can get it. So, let’s start by knowing what these mortgages are.
How Do Fix-and-Flip Mortgages Work?
In simple terms, fix-and-flip mortgages are short-term loans – generally 12-18 months – designed to help investors buy and renovate properties and then sell at a profit.
On average, a rehabber shoots for a 10 to 20% profit of the After Repair Value, but it varies depending on the market and the specific project risks. A 10% profit would be on the lower end, and a 20% profit would be considered a ‘home-run’ by most rehabber’s standards.
These loans are hard money loans, mostly from private or individual investors. The loans usually cover the purchase of a property at an auction or foreclosure, finance the upgrades and renovations, and all other expenses associated with that property.
Types of Mortgage Options For Fix-and-Flip Financing
What are the types of fix and flip financing? Investors can use six types of fix-and-flip mortgages to flip a property.
Housing flipping can be a potentially profitable way to invest in real estate when there is more demand for homes than supply, as in many real estate markets today. Most homebuyers don’t have the time, energy, money, or knowledge to find deals and do their own repairs.
In the following paragraphs, we will cover the types of mortgage options you have to use for fix-and-flip mortgages.
Using Hard Money Loans For Fix-and-Flip Mortgages
Hard money fix-and-flip mortgages are non-bank loans secured from specific, privately-owned lending companies, meaning they are not subject to the same lending requirements as conventional mortgages from traditional banks. Things like your credit score and income don’t apply to qualify for this loan. Instead, you can secure the loan with an asset as collateral. So, the property you are flipping will be the collateral should you fail to pay the loan as agreed.
If you don’t have enough cash to flip a house without financial help or have the cash but want to limit your risk, there are several ways to get funding. A hard money lender, private lender, or real estate crowdfunding site can help you achieve your house-flipping dreams.
The lender will acquire that property. So, even with a poor credit score or low income, you can still qualify for this loan, as the property you are flipping is a good-enough security for the lender. The processing time for hard money loans is also pretty quick, making them an ideal choice for anyone looking to snap a quick but great deal. There are short-term loans with a repayment period of up to 5 years. They, however, do attract higher interest rates compared to other conventional loans.
Can I Use My 401k For Fix-and-Flip Financing?
401(k) loans – you can also use your retirement plan to finance a flipping project. This, however, is possible only when your retirement plan allows it. Also, it may not be ideal for individuals approaching retirement age. You can take up to 50% of your balance, or $50,000 – whichever is less.
On average nationwide, house flipping generated a gross profit of $65,000 in 2021, on par with gross profit in 2017. But return on investment has shrunk to 31% from 51% over the same period. Gross flipping profit rose to $67,000 in the first quarter of 2022 but the return on investment declined to just 26%.
You will be charged interest on the loan, but since the money is yours, you will pay the interest yourself. You are given a maximum of five years to clear the loan. The processing of this loan is relatively fast, making it the go-to option for many investors. However, should you default on the loan, you will be putting your retirement fund at great risk.
Using Personal Loans For Fix-and-Flip Mortgages
Personal loans – whereas you may not qualify for a business loan since not many new businesses can attain the annual revenue and business credit profile, you can still qualify for a personal loan for business with your personal information.
It is common for experienced house flippers to achieve a return on investment that ranges from 10-20% after factoring in all the expenses involved when flipping a house. Assuming a 15% return would mean a net profit margin of $100,000. House Flip = $15,000.
Once approved, you can receive a lump sum that you will use on your flipping business. The rates and terms are favorable, resulting in a low borrowing cost. To qualify for a personal loan, you must have a decent credit score and a low debt-to-income ratio.
Using Home Equity Loans and HELOCs For Fix-and-Flip Mortgages
Home equity loans & HELOCs allow you to use your assets, such as your current home, to fund your flipping venture. You can qualify if you have home equity and meet several other requirements.
The profits from property flipping are most commonly treated as ordinary income rather than capital gains, although both can apply depending on how big the taxable amount is and which bracket it falls into.
If you don’t know what home equity is, it is the difference between your home’s value and what’s remaining on your mortgage. So, with home equity, you can get a lump sum that’s repayable over a long period. For HELOCs (home equity line of credit), you can draw from a line of credit several times until you get into the repayment period.
Using HELOCs Versus Non-QM Loans For Fix-and-Flip Mortgages
So, if you have an idea of how much money you need to buy and renovate a property, home equity would be a better choice, but if you need more flexibility with your funding, then go for a HELOC. The lender looks at your home equity to qualify for these loans. They then do a loan-to-value ratio to determine the amount you can borrow.
A HELOC can be a good choice if your renovation is ongoing or requires you to make a series of payments over time. That’s because this loan works much like a credit card. Your lender will approve you to borrow a certain limit based on how much equity you have in the property.
Other requirements include; a low debt-to-income ratio and a good credit score. Whereas they have low-interest rates and a relatively longer repayment time, they take time to be processed, meaning they are not ideal for quick deals. If you default on these loans, your home will be at great risk.
Using Business Line of Credit For Fix-and-Flip Mortgages
The business line of credit – this one is ideal for more experienced flippers. This loan gives investors access to specific funds they can draw from as needed and then pay interest only on the amount they use.
You could pay higher rates than you would for a HELOC. Because a home equity loan’s interest rate won’t fluctuate with the market, unlike a home equity line of credit (HELOC), the rate for a home equity loan is typically higher. Your home is used as collateral.
The loan is flexible enough, making it ideal when you are unsure how much you will spend fixing up the property or how much time it will take. This mortgage requires a decent credit score, strong business financials, and several years in business.
Traditional Fix-and-Flip Mortgages
A traditional mortgage – this one is for experienced flippers. It works just like the normal mortgages, where the lender gives you the money to purchase a home, and then you pay it back over a long period, 15-30 years. It has low-interest rates.
If you’re a savvy borrower looking to make extra income by fixing and flipping a house, you may wonder, “Can you flip a house with a conventional loan?” The answer is “yes,” but you’ll have to meet more stringent borrower requirements than you would if you purchase a home with the intent of residing in it .
To qualify, you must show the lender your experience in flipping properties and meet the credit requirements as needed. There are a couple of other requirements you will also have to meet.
Tips For Getting Approved For Fix-and-Flip Mortgages
Truthfully, fix and flip loans aren’t easy to get, especially if it’s your first time flipping. But as you gain experience, qualifying for most of these loans will become easier – even the super-competitive ones. With that said, here are a few tips on how to get the right mortgage for your flipping business.
A home equity line of credit (HELOC) or home equity loan allows you to tap into the equity you’ve built in your primary residence (if you have one) to finance a fix-and-flip project.
Understand your financing needs – before everything else. You need to gather as much information about the flipping project as possible and then create an accurate scope of work and a plausible timeline so that you can estimate the costs accurately. Now, with this information, you will know the amount of money you need for your entire project.
Eligibility To Qualify For Fix-and-Flip Mortgages
Evaluate your qualifications:
- With that information. It’s time to evaluate your credentials, including your credit score, revenue streams, DTI ratio, time in business, etc., to determine the type of loan you qualify for.
- First-timers tend to rely more on their financial history and personal credit to secure a loan, while experienced flippers use their house-flipping portfolios and business financials.
How Do I Choose The Mortgage Lender With the Best Terms and Rate For Fix-and-Flip Mortgages?
Find the right lender – the right lender depends on the type of loan you need, your qualifications, and your project details, among other factors.
If you think house-flipping may be for you, ask yourself these questions before getting started: How is my credit? Unless you’re paying for each house in cold cash, you’ll need a minimum credit score of 550 FICO to qualify for mortgages on the homes you’ll be flipping.
Do more research, compare the different rates and terms, and select the most competitive ones. Also, the lender must have experience in the flipping industry and can show you their past work.
Benefits and Terms of Fix-and-Flip Mortgages
Flexible terms – the flexibility of many fix-and-flip mortgages makes them super attractive to flippers or aspiring flippers. As you may know, bank mortgages have very strict regulations and processes and take quite a long time to process. But fix, and flip loans are the opposite, with flexible terms and fewer stipulations.
How Long Do Fix-and-Flip Mortgages Take To Get Approved?
Non-QM Mortgage Brokers offers fast approval on fix-and-flip mortgages. Fix-and-flip mortgages are quickly approved, making them ideal for acquiring a certain property quickly, especially when the competition is high. Also, the fast approval means that you will be able to capitalize on property prices as they are currently, as opposed to other mortgages where by the time you get the loan.
To get a house-flipping loan, you’ll need to meet certain lending requirements and disclose select financial information. This often means having to meet credit score minimums, make a certain size down payment and provide lenders with a copy of your employment, residential and credit history.
Home prices, especially prices of fixer-uppers, have heavily fluctuated to the upside. Fix and flip loan lenders are more concerned about whether the property will sell after the upgrade. So, if they are convinced it will sell and you have a solid repayment plan, they will approve the loan without any delays. Controlling the buyer’s mortgage rate – as the loan providers allow you to purchase, construct or repair the property. At lower interest rates, it becomes possible for you to offer the buyer a better price, thereby allowing it to sell pretty quickly.
Fix-and-Flip Mortgages For Bad Credit Real Estate Investors
You can qualify for fix-and-flip mortgages with bad credit. As we mentioned in the article, you can qualify for the hard money loan option, as your income or credit score doesn’t matter.
Fix-and-flip mortgages offered by Non-QM Mortgage Brokers allows real estate investors to buy and renovate a fixer-upper all in one loan and closing. Fix-and-flip mortgages are for primary, second homes, investment homes, and commercial properties.
What happens is that you put the property you are renovating as collateral, such that the lender can acquire the property if you fail to pay the mortgage. This is why the lender isn’t always concerned about your credit score.
Best Mortgage Lenders For Fix-and-Flip Mortgages
In the end, fix-and-flip mortgages are essential to acquiring properties with potential, renovating, and then selling at a profit. Whether you are a beginner in the flipping industry or a seasoned investor, these loans are a good choice, especially the hard money option, which you can use after a quick deal. Remember to do your due diligence to understand the market in which you operate better when looking for the right lender for fix-and-flip mortgages.
Non-QM Mortgage Brokers are mortgage brokers licensed in 48 states with a national reputation of being able to do mortgage loans other lenders cannot do. Over 75% of our borrowers are folks who could not qualify at other lenders due to overlays, stress, last-minute loan denial, or not having the mortgage products. Non-QM Mortgage Brokers, we only market existing mortgage loans that are possible at competitive rates. Besides government and conventional loans with no lender overlays, we offer hundreds of non-prime mortgage programs including non-QM and non-prime mortgages.
If you have any questions about the content of this blog on fix-and-flip mortgages, please contact us at Non-QM Mortgage Brokers at 262-716=8151 or text us for a faster response. Or email us at gcho@gustancho.com. The team at Non-QM Mortgage Brokers is available seven days a week, on evenings, weekends, and holidays.