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Getting started with fix and flip investing can be an exciting yet daunting task for beginners. Where do you begin? How do you find the right property? And most importantly, how do you fund these types of real estate deals, especially if you have limited capital?
This is where fix and flip loans come in. These specialized loans provide the financing real estate investors need to purchase and renovate distressed properties. The goal is to “fix” and “flip” the home – make repairs and upgrades then quickly resell for a profit.
Fix and flip lending has exploded in popularity in recent years as more folks look to real estate investing as a wealth-building strategy. But navigating the fix and flip loan process for the first time can be confusing.
In this comprehensive guide. we’ll break down everything beginners need to know to leverage fix and flip loans to fund their first projects including
- What is a fix and flip loan?
- Benefits of fix and flip loans
- Types of fix and flip loans
- What do lenders look for?
- Step-by-step process to get funded
- Mistakes to avoid with fix and flip loans
- Alternatives to hard money loans
Let’s get started!
What Are Fix and Flip Loans?
A fix and flip loan is a short-term loan used by real estate investors to finance the purchase and renovation of a property. The goal is to “flip” the home for a profit.
These loans are considered a type of bridge or hard money loan, with typical terms of 6 months to 3 years. The defining features of fix and flip loans:
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Intended for investment properties: The home is not meant to be a primary residence. Lenders need to see a business plan for how you’ll generate a return.
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Interest-only payments: You only pay the interest each month, not the principal. The balance is due as a balloon payment when the loan matures.
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Shorter terms: Enough time to rehab and sell, usually 6-36 months.
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Higher rates: Usually 8-15%, higher than conventional loans.
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Flexible qualifying: Based on the projected value, not your income or credit score.
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Fast funding: Can receive funds in a few days to a couple weeks.
While there are risks, these loans allow investors to move swiftly to capitalize on a deal before reselling for big profits.
The Benefits of Fix and Flip Loans for Beginners
Fix and flip loans offer several advantages that make them appealing funding options for new real estate investors:
Easy Qualifying
Lenders mainly look at the projected value of the finished project, not your income, assets, or credit score like conventional lenders. If the numbers make sense, you have a good shot at getting approved even as a first-timer.
Purchase and Renovate in One Loan
There’s no need to coordinate separate financing for purchasing the property and funding repairs. Fix and flip loans roll everything into one easy loan.
Fast Access to Capital
You can receive funds in a few days to weeks rather than months with conventional mortgages. Speed and agility are necessary in the competitive fix and flip game.
Interest-Only Payments
You only pay interest each month, freeing up capital for renovations. You repay the balance when the home sells.
No Prepayment Penalties
You can pay off the loan as soon as the property sells without penalties. This allows you to exit once you complete the flip.
High Leverage
Lenders may finance up to 90% of the purchase price and rehab costs. This allows you to take on projects with less cash invested.
Types of Fix and Flip Loans for Beginners
If you’ve decided to move forward with a fix and flip project, the next step is finding the right loan product. Here are some of the most common types of financing for new investors:
Hard Money Loans
Hard money loans are the most popular fix and flip loan option. Private lenders provide these short-term loans, collateralized by the investment property itself.
Typical Terms:
- 6 months to 3 years
- Interest rates from 8% to 15%
- Up to 90% of purchase + rehab costs
- Interest-only payments
Pros: Fast, flexible qualifying, high leverage.
Cons: Short terms, higher rates, points + fees.
Good for new investors who need funds quickly and have a solid exit strategy.
Bridge Loans
Bridge loans have longer terms than hard money loans, often 2 to 5 years. Banks and credit unions provide these loans at lower rates.
Typical Terms:
- 2 to 5 year terms
- Interest rates from 7% to 12%
- Up to 80% of purchase + rehab
- Interest-only payments
Pros: Lower rates, longer terms, lower fees.
Cons: Slightly stricter qualifying, slower funding.
A good option if you need more time or have projects in less competitive markets.
FHA 203(k) Loans
FHA 203(k) loans are government-backed mortgages that include renovation financing.These are the only conventional loans that allow you to buy and renovate in one loan.
Typical Terms:
- Up to 30 year fixed rates
- As low as 3.5% down
- Funds purchase + renovations
- Principal + interest payments
Pros: Low down payments, low rates, long terms.
Cons: Strict approval guidelines, max loan limits, must be primary residence.
Only feasible if you’re house hacking or rebuilding your primary home. Not ideal for quick flips.
Home Equity Loans / Lines of Credit
If you have sufficient equity in an existing property, like your primary residence, you may be able to use a home equity loan or HELOC to fund fix and flips.
Typical Terms:
- Interest rates from 5% to 8%
- Up to 80% of your current home equity
- Fixed terms or revolving credit lines
Pros: Potentially lower rates, use existing equity.
Cons: Risks your current home, smaller loan amounts.
Only viable if you have enough equity and are comfortable using your primary home as collateral.
What Do Lenders Look For?
Qualifying for a fix and flip loan is different than a conventional purchase loan. Lenders main focus is the projected value of the finished project – known as the after repaired value (ARV).
Here are the key factors lenders evaluate:
After Repaired Value (ARV)
This is the anticipated value of the property after all repairs and renovations are completed. Lenders require a credible ARV estimate, preferably from a licensed appraiser. The ARV determines the maximum loan amount.
Loan-to-Value (LTV) Ratio
The LTV compares the loan amount to the ARV. Most lenders cap LTVs at 80-90%. The lower the LTV, the less risky the deal is for the lender.
Loan-to-Cost (LTC) Ratio
The LTC compares the loan amount to the total project costs (purchase + rehab). Lenders generally look for LTCs near 80%, meaning you’ll have 20% cash invested.
Experience
Some lenders may want to see that you have some experience with real estate investing, contractor relationships, and a plan for managing the project.
Exit Strategy
Lenders will look for a feasible exit strategy andrealistic timeline to resell the property, usually 6 months to 2 years.
How to Get a Fix and Flip Loan as a Beginner
If you find a promising investment property and want to move quickly, here are the key steps to securing financing:
1. Calculate your numbers
Determine the ARV, total project costs, and how much financing you need. Conservative estimates are key – don’t be overly optimistic!
2. Review lender options
Research lenders like banks, credit unions, or private lenders. Weigh the pros and cons to pick the best loan type and product for your project.
3. Choose 1-2 lenders to apply with
Submit applications with your top lender picks. Many lenders have an easy prequalification process to confirm you are likely to be approved.
4. Submit your project plan
Provide details on the scope of work, budget, timeline, ARV estimates, and your team. Organized paperwork will help your case.
5. Get an appraisal if needed
Some lenders may ask for an appraisal to back up the ARV. Be ready to pay $300-$500 for a reliable appraisal.
6. Close on your loan!
Once approved, you’ll go through the closing process to sign loan documents and receive the financing. Now the fun part starts – time to start renovations!
5 Mistakes to Avoid With Fix and Flip Loans
While fix and flip loans can be profitable, utilizing them effectively takes some finesse. Here are some key mistakes beginners should avoid:
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How does a fix and flip loan work?
| Loan type | Best for |
|---|---|
| Business line of credit | Experienced flippers looking for flexible financing. |
| Hard money loans | Borrowers who prefer a quick option or who can’t secure another form of financing. |
| Home equity loan/home equity line of credit | Homeowners who have more than 15% equity in their primary residence. |
| Personal loans | House flippers with good personal credit who need a relatively small amount of funding. |
| 401(k) loans | House flippers with established retirement savings who aren’t close to retirement age and have exhausted other options. |
| Seller financing | Flippers who can find a seller willing to work with them and don’t have other financing options. |
What is a fix and flip loan?
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Fix and Flip Loans for Beginners
FAQ
What is the 70% fix and flip rule?
How much money do I need for a fix and flip?
Is a fix and flip loan a hard money loan?
Should you get a fix and Flip loan?
If you’re new to house flipping, a fix and flip loan may make your job harder than it needs to be the first time around. Other options for financing your project include a business line of credit, a HELOC, peer-to-peer lending, a personal loan, a hard money loan, and a small business loan.
How to finance a house flip?
If you’re wondering how to finance a house flip, you may wish to consider the following options instead: Hard money loans: Hard money loans are short-term loans that may require you to use real property or equity as collateral. They’re typically offered by private lenders or investor groups rather than banks and credit unions.
How does a fix & flip mortgage work?
Typically fix and flip loans have a fixed interest rate, and many may be balloon mortgages where you pay only interest until the end of the loan term, at which time the principal is due. You pay the monthly mortgage payment on the loan while you renovate or have the house on the market, then pay the balance of the loan once you sell the home.
How do I qualify for a fix and Flip loan?
To qualify for a fix and flip loan, you’ll need a good credit score, a solid business plan and a property that can be improved and sold for a higher price. The amount borrowed typically depends on the property’s after-repair value (ARV).