What Are Fix and Flip Loans?
Fix and Flip loans are hard money loans used to purchase and rehab a property, and then resell it at a higher value. The Fix and Flip lending market has been quite frothy the past few months. If you are an experienced flipper, you may notice that your old lender of choice has increased rates, decreased LTVs, and in some cases quit funding altogether.
For first timers, the market has become substantially hard to break into.
But great news! We have seen a resurgence in fix and flip lending in the past week and are pleased to announce we are funding in 42 states again, and multiple lenders are still doing 80/100 (80% of purchase and 100% of rehab) with rates in the 8’s and 9’s.
These loans do not require tax returns, income/employment, or debt-to-income ratio calculations.
Here are some key things to look for when searching for the best mortgage lenders for a Flipper/Rehab:
What is LTC?
Fix and Flip loans are ideal for real estate investors looking to purchase, renovate, and sell a property within a short period of time, usually 12 months. Banks typically will not lend on distressed properties or those in disrepair, which is why private and hard money lenders step in to provide financing.
LTC stands for Loan to Cost, and is a metric used to determine the total loan amount a borrower qualifies for. Fix n flip lenders are currently lending around 80-85% of total project cost, including the purchase price and rehab budget. Sometimes LTC is expressed as two numbers, for example 80/100, meaning the borrower qualifies for a loan equal to 80% of the purchase price, and 100% of the rehab funds.
The total loan is constrained by ARV, explained next.
What is ARV?
ARV is After Rehab Value. Lenders are typically between 60% to 70% of your ARV. Meaning if you have a home you purchased to flip and your plan is to sell it for $1,000,000 upon completion, then your max loan amount at 65% ARV is $650,000.
If you find a lender who will give you 80/100 on a flipper loan and you are purchasing the property for $700,000 and doing $100,000 in rehab, then your total loan amount would be $660k + closing costs and fees. $700k * .80 = $560k + $100k rehab = $660k. With the same $1,000,000 sale price, a lender offering 65% ARV will not work, but a lender offering 70% will.
Make sure you account for this when working up your budget and searching for the right lender.
How is interest charged?
Lenders may charge interest on the full loan amount from day one. Alternatively, lenders may charge interest only on funds as disbursed. This can make a substantial difference in the total amount paid back to the lender throughout the life of the loan. Once again, make sure you account for this when writing up your budget.
How do reimbursement draws work?
Most lenders do a reimbursement draw. This means the lender will reimburse renovation costs after the work has been completed. For example, if you pay your contractor $10,000 to complete a new kitchen, you bring the receipts to the lender and they will approve the work done and then reimburse you for those costs. There are some lenders who will advance the money to you, but this is not typical. Many times, if lenders will advance you the money it is going to be based on your track record and number of projects done.
You also want to keep in mind what the lenders draw fees are. It is often a good practice to keep your draws to a maximum of 4 to 5 per project to avoid paying a lot of extra money in draw fees.
What is your experience level?
Project experience is the key factor in the rate and terms a lender will provide. When flipping a house, your experience is going to far outweigh your credit and most other determining factors for a loan.
All lenders are going to vary when it comes to how much experience you need for their top tier programs. With at least one flip under your belt at or around the same value as your current project, you can usually see a substantial jump in LTV and rehab amounts that the lender will provide.
Some lenders will consider you top tier with 5 flips in two to three years and some require as many as 20 in two to three years to reach top tier. Getting to a lender’s top tier will typically allow you to put less money down, have better interest rates, and potentially lower the origination costs of the loan. Each lenders tiers are different, so make sure you know where you fit in their guidelines.
How long do they take to close?
