What is a fix and flip loan?
There are various fix and flip loans available to real estate investors. When choosing whether to go with a conventional mortgage loan or a hard money lender, there are a few things to consider. Two great financing options for fix and flip real estate investors are a 203K loan and a hard money loan. A 203K loan is a conventional mortgage loan option for fix and flip investors that specializes in renovation or construction projects and is backed by the FHA. On the other hand, a hard money fix and flip loan is a real estate investment loan that is backed by a private lender instead of a bank.
A 203K loan has a 30 year term, with an APR of 3.3% – 3.8% and up to 2.5 points due to the lender in origination fees. With this type of mortgage, the investor is responsible for a minimum down payment of at least 3.5% of the total deal cost. However, there are restrictions regarding the type of renovations permitted for this loan, and the maximum dollar amount.
How does a fix and flip loan work?
With a fix and flip hard money lender like ABL, the investor typically needs to bring more capital to the project. On average, a hard money fix and flip loan will finance about 80% – 90% of the total deal cost, leaving the investor to bring 10% – 20% to the table. Interest rates can range anywhere from 9% to 11% with origination points between 1% and 2%. Hard money fix and flip loans are short term, and designed specifically for fix and flip investors.
ABL’s hard money loans have a 12 month term, and no pre-payment penalty if you flip the property quickly and payoff the loan before maturity. Contrary to the 203k, a hard money lender is more flexible when it comes to lending criteria, underwriting guidelines, and closing speed.
What are the benefits of a hard money fix and flip loan?
For a fix and flip loan, the loan amount is calculated by looking at the value of the property in its current condition, as well as the intended renovations and estimated after repair value (ARV). A hard money loan is an attractive option for real estate investors because the loan is based primarily on the property and the deal itself; there is no minimum credit score required. With a conventional 203K loan, a minimum credit score of 640 is required and a minimum of $35,000 in repairs must be completed. With a hard money loan, there typically isn’t a minimum amount of renovations required. Additionally, investors using a hard money fix and flip loan can use any licensed contractor they want – not only one pre-approved by the lender. Plus, perhaps most importantly, a lender like ABL can close in days (2 is our record!). Conventional mortgages take at least 60 days to close. In the real estate investing world where investors are working with distressed properties, you need a lender that can fund a deal in days – not months.
How can you get a hard money loan?
The process of securing a hard money loan is much different than that of a conventional mortgage. Unlike a 203K loan, which requires a significant amount of paperwork, a hard money loan is much less document intensive. Once you find the property, you’ll speak with a loan officer and fill out our short online application. Once you’ve completed the hard money loan application, the loan officer and underwriter will review the deal with you and order an appraisal if it makes sense. From that point, ABL issues a written term sheet that outlines all of the loan’s details so there are never any hidden fees. The loan then moves to processing where the few required documents are collected, and ultimately the loan is closed by an attorney.
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