What is a Fix and Flip Loan?

A fix and flip loan is a short-term financing solution that real estate investors use to purchase, renovate, and quickly sell a property for profit—a process known as house flipping. These loans typically cover the cost of buying a property, funding renovations, and handling expenses related to selling the property.

How Do Fix and Flip Loans Work?

Fix and flip loans can be structured in various ways, such as term loans or lines of credit, depending on the lender and borrower’s needs. These loans are usually secured by the property being purchased and renovated. In many cases, there is no penalty for early repayment.

Lenders use several key metrics to determine the amount of funding a borrower can receive:

• Loan-to-Value (LTV) Ratio: Compares the loan amount to the value of the property. Typically, fix and flip lenders provide up to 90% LTV.
• Loan-to-Cost (LTC) Ratio: Compares the loan amount to the total project cost, including the purchase price and renovation expenses. Some lenders offer up to 90% LTC or higher.
• After-Repair Value (ARV): Estimates the property's value after renovations. For example, a lender might offer 70% of the ARV, meaning a $200,000 post-renovation property could secure a loan of up to $140,000.

Types of Fix and Flip Loans:

Here are the most common fix and flip loan types:

• Business Line of Credit: Offers flexible financing, allowing experienced flippers to borrow only what they need for each phase of a project.
• Hard Money Loans: Non-bank loans that are ideal for quick funding, typically based more on the property’s potential than the borrower’s credit history.
• Home Equity Loan or Line of Credit (HELOC): Homeowners can leverage the equity in their primary residence to fund their flips.
• Personal Loans: Suitable for small projects and flippers with strong credit histories.
• 401(k) Loans: Investors can borrow from their retirement savings, although this method carries significant risk.
• Seller Financing: The property seller acts as the lender, which can be beneficial when other financing options are unavailable.

Getting a Fix and Flip Loan: Securing a fix and flip loan may be challenging for beginners but becomes easier as investors gain experience. To get started:

• Assess Your Financing Needs: Develop a clear budget, scope of work, and timeline for the project.
• Evaluate Your Qualifications: Understand your credit score, financial history, and time in business to determine which loan options you qualify for.
• Compare Lenders: Look for lenders experienced in house flipping and compare rates and terms to find the best option.

Consulting with experienced investors and your Go-To Mortgage Advisor, Dustin Dumestre (Brokered Loan Officer) can help ensure you choose the best loan for your project.