Choosing The Right Loan For Flipping Houses

There are many types of loans for real estate, not all of them are appropriate for every situation. In fact, some mortgage loans are downright unwise for certain kinds of investments, particularly for short term investments like flipping houses. This guide compares traditional mortgages to short-term fix-and-flip financing, and describes different types of fix and flip loans.

Traditional Mortgages

Traditional mortgages may be the type of loan that new rehab investors are the most familiar with. The lower interest rate of traditional mortgages may seem inviting at first glance. However, banks will almost never approve a loan on a house that needs substantial work. If the house only needs very minor cosmetic work then in some cases they may approve a loan; however due to their very slow process and all the red tape it will almost never be practical. In fact that is the fastest way to lose out on the offer and ruin your reputation for being able to close fast as most likely you will be kicked out of escrow for not being able to perform/fund on time. Remember the selling agent will  almost always have back up offers ready to close all cash or very quick escrows. Also, many conventional loans may justify the lower interest rate by charging significant prepayment penalties for borrowers who pay off the loan early. The penalties alone may negate the benefit of a low interest rate. Regular mortgages are almost never the best choice for investors who want to purchase a home and pay off the loan in a short period of time.

Fix-and-Flip Financing

Lenders like Aztec Financial offer funding for real estate investors who want to buy a property, fix it and flip it in less than a year. These fix and flip loans tend to be less like a traditional mortgage because they require a different application process. Some of the differences include:

• no income verification
• no minimum down payments
• no upfront appraisal fee

The interest rates are slightly higher than traditional mortgages but the loan is much shorter, typically 6-12 months and never have the prepayment penalties traditional mortgages carry.

LTV/LTC Loans

Loans for both traditional home purchases and for home flipping can be made based on the home’s current appraised value, called “loan-to-value” (LTV). LTV loans have limits based on a set percentage of the home’s value as-is, typically 80-95 percent of the existing property value. These types of loans are usually best for investors who simply need funds to purchase the home and already have their own funds to do the rehab.  Some lenders  like Aztec Financial also make loans based on ARV or after repaired value. This type of loan may give you not only the purchase price, but also the costs to repair the property. This is a much more leveraged loan which allows you the borrower more freedom with your cash flow.

ARV Loans

In most cases, loans based on the after-repair-value (ARV) are ideal for flip investors. Sometimes, a home buyer gets a truly phenomenal deal on a home that will, after repairs, increase in value by 50 or even 100 percent after renovation. ARV loans are based on a percentage of the home’s expected future value after the work is complete, usually 65-75 percent of the ARV.  With a good buy on a property, some investors can get funding based on the ARV and have plenty of money to buy the home at 100 percent financing, with extra cash to finance repairs and upgrades. Flipping homes has reached a two-year high. More and more investors are finding access to appropriate forms of financing for their real estate investment plans. Many people find that basing their financing on the ARV of the home simplifies the process and provides them with the money they need to make renovations to prepare the home to sell. Aztec Financial has 29 years of experience as a direct lender for investors who want to fix and flip homes. Contact us to find out our loan options that are tailored for home flipping.