Flipping houses is a real estate venture considered by several investors around the world. It includes buying cost-effective houses that require fixing and refurbishing. After the fixing is complete, the house is sold at a price more than the amount paid for purchasing. House flipping is a lucrative real estate business, but is not without risks, especially for beginners and amateurs. Despite being a profitable business, and widely practiced one, financing for flipping houses is quite a challenge.
Who offers flipping houses financing?
Several lenders offer varying loans for financing flipping houses. The lenders also offer different options so that the borrower can pick the best one and acquire the required financing. The types of lenders offering to finance are as follows:
- Private lenders including credit unions, banks, and other financial institutions
- Fintech services, which include app-based or online financial lenders
- Crowdfunding sites are cloud-based services that enable pooling funds from a wide array of investors.
- Hard money loans allow borrowers to secure an amount with real property or equity as collateral.
Out of the above-mentioned flipping houses financing options, hard money loans are considered the best option, especially for those planning to invest in flipping houses.
Hard money lenders facilitate flipping houses financing
Often individuals seem interested in purchasing the house flipping properties, fixing them, and then selling at profitable prices. But the lack of adequate cash and financing for flipping houses often leads to seeking bank loans or other traditional loans. To get approval from a traditional bank loan or other sources, one must have a strong credit score. Flipping homes usually don’t get loans from traditional banks, and even if they do, the borrower needs to have an incredible credit history. This is where hard money loans can be beneficial.
All about hard money loan
A hard money loan or hard loan is a short-term loan borrowed by real estate investors as collateral. Hard money loans are financed by private investors unlike conventional banks, thereby often known as private money loans. The loan amount is funded based primarily on the real estate property investment value. The borrower’s financial history or credit score is not given much importance.
Determining hard money loan amount
The hard money loan amount is influenced by the ratio of amount divided by the property value (collateral) or by the LTV (loan-to-value) ratio method. It is no doubt hard money loans are easier and faster to get when compared to traditional loan lenders. But, the borrowers need to undergo certain qualifying processes abided by specific terms and conditions set by hard money lenders.
Loan repayment methods
Also referred to as bridge loans, hard money is utilized by real estate property investors in need of quick financing for flipping house projects. The hard money loans are for a short tenure ranging from six months to twelve months. It cannot be extended more than a term of five years. The monthly loan repayment option is available in two forms:
- Interest and principal amount payment
- Interest-only payment
The terms and conditions vary from one lender to the lender. In the majority of the cases, the terms are based on the experience of the investor and the type of property in consideration.
Why consider hard money?
The following instances will explain the reason behind favoring hard money financing for flipping houses.
- When an investor has an excellent real estate investment deal but lacks the time to undertake the lengthy and complicated traditional bank loan process. This is one such situation when considering a bridge or hard money loan is better as it gets approved within a week, and the process is not cumbersome.
- Secondly, the hard money loan for flipping housing projects is the best option when the credit score of the borrower is not high enough. Furthermore, when the income background doesn’t cater to the requirements of banks and traditional lenders, there is no better alternative than hard money.
- When one fails to have enough cash or is without access to private funding from family and friends, investors consider hard money lenders for their real estate property investments.
- When an individual is interested in fixing and flipping properties and demands quick funding, hard money lenders are the best consideration. Unlike conventional lenders, hard money loans don’t require undergoing any stringent credit history evaluation.
Requirements for hard money loans
It has been mentioned earlier that hard money lenders are primarily concerned with the property value that acts as collateral. The terms and requirements will depend on the lender and also the different circumstances of the borrower. Some basic requirements for hard money loans are as follows:
- The experience and the number of flipping house projects the investors have been engaged with. A beginner might have to pay a higher interest rate, with experience the lenders will offer lower interest rates. The more flipping house projects one completes, and the more successful repayment of loans are delivered, the lenders offer better interest rates.
- The majority of the hard money lenders function locally in specific regions of the states. The borrower has to find out whether he/she can avail of services of any specific hard money lender in a certain geographic location.
- The type of property that is under question also determines the loan approval and the amount sanctioned as financing.
- The intent and documentation of the property along with the insurance, and scope of work are some of the requirements for hard money financing for flipping houses.
Things to consider while seeking hard money
- Information about the origination fees
- Assessing the transparency of the lender, and whether there are any hidden fees
- Does the lender cover rehab expenses?
- How much of the LTV does the lender allow to borrow?
- The turnaround time
- Understanding clearly the terms of the loan
- The presence of an account manager to take the borrower through the process
The above-mentioned are some of the basic considerations for hard money loans for flipping houses financing.
Flipping house projects are lucrative real estate investment, but carries a lot of risks. Furthermore, financing for flipping houses is not an easy procedure. Traditional bank loans usually don’t get approved for flipping house projects. This is where hard money loans are considered the best option.