Securing loans for flipping houses can be quite a challenge for investors. There are many loan options available to flip houses. It is important to distinguish the pros and cons for each type of loan in order to decide which is your best option.
Conventional loans are loans given by banks and mortgage companies. These loans are solely based on the borrower’s FICO score and income. There are a variety of conventional loans to qualify for. These loans can be easier on your wallet than other options. The interest rates are at market level, which will be lower than most other loan options, and the payments will be spread over a longer period than other loans—usually 20 to 30 years. The down payment on a conventional loan will depend on the program a borrower qualifies for and can be anywhere between 3% and 20%. Typically, these are not given out to fix & flip houses. To qualify for these types of loans you need a great credit history—banks like to see at least a 650 FICO score, a low debt-to-income ratio and proof of income from the same place of business for at least 2 years.
Government Insured Loans
The Federal Housing Administration (FHA) offers rehab (Arizona Fix and Flip) financing through its 203k loan program. This loan covers the lender for both the property itself and the renovation costs, unlike conventional loans that only lend for the purchase of the property. These loans can be used for multi-unit property investments. The only catch is that the borrower is required to live in one of the units. This loan is a very low cost financing plan, but the government has many rules and the borrower must adhere to all those rules to get financing. These loans are only available for a limited selection of properties and there can not be extensive repair to the house. These loans are meant for properties that only need cosmetic repair.
Owner financing refers to the owner of the property lending the money to the buyer of the property, takes a mortgage on the property sold and is repaid through monthly installments based on the terms between both parties. This type of “loan” is usually closed quickly, and the fees that other lenders charge are usually not included. The problem with this situation is most sellers cannot afford to maintain their lifestyle while they wait for the money, from the house they sold, to be paid in full. If the buyer defaults then the seller is forced to take them to court and add that additional headache to their life. This type of loan can get very complicated, very quickly.
A Arizona Hard Money Loan is the most popular loan for real estate investors. This type of loan is backed by the borrower’s assets not their credit score. In fact, most hard money lenders aren’t overly concerned with a borrower’s income as long as they have the hard assets needed to cover the loan. They are interested in the return of their investment. Loans are typically closed within 3 days, down payments are negotiable, and often 100% financing is available. The interest rate is higher than other options (usually 7-15%) and they are short-term loans (3 months to 5 years).
Whichever financing method you choose make sure it is a method that will ensure you will be put you in a position to continue to invest.
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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.