Stringent eligibility requirements, coupled with expensive purchase and renovation costs, can make it challenging to obtain loans for flipping houses.
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
, over 207,000 properties flipped last year, reaching an all-time high since the market crash of 2007. Steady home price increases and limited inventory have created an environment that allows successful house flippers to earn substantial profits. Although house flipping can be lucrative for some, it is nevertheless an expensive endeavor that requires careful planning.
Financing a house flip
includes not only the cost of purchasing a property but also the cost of taxes, utilities, labor, and mortgage payments made throughout the renovation and re-selling timeline. Not having enough cash can be a tricky barrier to entry for beginner investors. In addition, 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 the 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. For example, an investor might choose to finance a house flip with a traditional mortgage if they have enough cash assets to use as collateral or equity in a leveraged property. Owner-occupants, or those who plan to flip a house while occupying the property for an extended 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.
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: Arizona 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 take out equity from the existing property as a new loan to 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:
An Arizona 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 partnership is an excellent way for a beginner investor to get into the house-flipping business. A partner might be willing to finance a property, ready to trade their knowledge and expertise in exchange for grunt work or a little bit of both. In a joint partnership, the partners 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.
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.
Loans for flipping houses in Arizona
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.
Equal Housing Opportunity. This is not a Good Faith Estimate and this is not a Guarantee to lend and should not be considered as such. Costs, rates, estimates and terms can only be determined after completion of a full application. Actual payments will vary based on your individual situation and current rates. APR for loans vary from 7.99 – 29.5% and is based on Credit Score, Down Payment, LTV, Income. Mortgage rates could change daily. To get more accurate and personalized results, please call 623 582 4444 to talk to one of our licensed mortgage experts. Terms and conditions of all loan programs are subject to change without notice. Level 4 Funding LLC, 22601 N 19th Ave Suite 112, Phoenix AZ 85027, 623-582-4444 NMLS 1018071 AZMB 0923961 This e-mail is for the exclusive use of the intended recipients, and may contain privileged and confidential information. If you are not an intended recipient, please notify the sender, delete the e-mail from your computer and do not copy or disclose it to anyone else. Your receipt of this message is not intended to waive any applicable privilege. Neither this e-mail nor any attachment’s establish a client relationship, constitute an electronic signature or provide consent to contract electronically, unless expressly so stated by Dennis Dahlberg RI/CEO, Level 4 Funding LLC, in the body of this e-mail or an attachment. To the extent this message includes any tax or legal advice this message is not intended or written by the sender to be used, and cannot be used, for legal or tax purposes or advice.
About the Author: Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 43 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.