Fix and Flip / Fix to Rent
A fix and flip loan is beneficial for real estate flippers looking to renovate and flip or sell a property at a higher value.
These loans utilize a short term limit, usually 12 to 24 months depending on the extent of the renovation.
DSCR Loan Details
A Fix and Flip loan is a hard money loan used to purchase and renovate a property, and then sell it at a higher value. If you are an experienced flipper, you will typically receive better terms than a first time or new flipper. for instance, an experienced investor may be provide a 90% of purchase and 100% of renovation terms. Wile a new or first time investor could be reduced to 80% or 85% of the purchase price.
These loans do not require tax returns, income/employment, or debt-to-income ratio calculations.
Hard money loans have terms of between 12-36 months but can be longer on a case-by-case basis. They are most often structured with interest-only payments, such that the loan balance is never paid down during the life of the loan, but rather includes a balloon note for the entire loan balance at the end of the loan term.
Rates and fees charged by hard money lenders are almost always higher than traditional loans. For example, rates are generally between 7% and 12% but vary widely based on property type and use, location, and LTV.
Hard money loans are commonly used to purchase 1-4 united residential properties quickly because their speed often provides same-as-cash purchasing power.
In addition, many investors utilize the equity in their property by “cashing out,” or placing a lien on property in exchange for cash proceeds.
Hard money lenders are far less concerned with credit issues such as foreclosures, bankruptcies, late mortgage payments, etc., and have less stringent underwriting guidelines.
There are times when a borrower is simply unable to provide documental traditional lenders require, whether due to the nature of their business, or the fact that tax returns may not be an accurate reflection of the current financial situation.
Hard money lenders are willing to look past such credit issues where there is enough equity in the property, or a borrower has enough access to capital to make payments on the debt.
Hard money lenders typically do not want tax returns or employment/income info. If there is significant equity remaining in the property after the hard money loan is accounted for, some hard money lenders will refinance a property with nothing more than a Driver’s License, Preliminary Title Report, and a visual inspection of the property (a “drive-by appraisal”).
A fix and flip loan is a powerful tool for real estate investors. They are quick and flexible, providing same-as-cash purchasing power. A fix and flip loan is also the most viable option for financing renovations or other value add projects. LTC stands for Loan to Cost, and is a metric used to determine the total loan amount a borrower qualifies for. ARV is After Renovation Value, lenders are typically between 60% to 70% of your ARV.
Lenders may charge interest on the full loan amount from day one. Alternatively, lenders may charge interest only on funds as disbursed. Project experience is the key factor in the rate and terms a lender will provide.
The Fix and Flip market is competitive, and therefore a quick close is imperative. There are different types of hard money loans, Fix and Flips, Commercial Value Adds, and Construction Loans. Also, 1-4 Unit Residential Purchase, Cash Out Hard Money Loans and commercial hard money loans. The 2 main reasons to use hard money are speed and temporary financing.