If youre considering purchasing properties to fix and flip but dont have the cash, youll need a loan to help get started. House flipping is an investment in real estate, it involves purchasing comparatively inexpensive homes that often need work, then fixing them up and selling them for more than you paid. House flipping can be lucrative but comes with significant financial risk, especially for beginners. Lets dive into how to secure financing for your flip.
Flipping houses has become an increasingly popular way for real estate investors to make money. The basic idea is to buy an undervalued property, renovate or repair it, and then sell it for a profit. However, successfully flipping a home requires more than just finding a good deal. You also need access to financing in order to purchase and remodel the property. This is where hard money loans come in.
Hard money loans are a type of short-term financing specifically designed for real estate investors who want to rehab and quickly resell a property Unlike traditional mortgages from banks, hard money loans are provided by private lenders and investors The loan is secured using the property itself as collateral. This gives hard money loans some major advantages for house flippers.
In this article, we will dive deep into everything you need to know about using hard money loans to fund your next flip.
What is a Hard Money Loan?
A hard money loan is a short-term, asset-based loan provided by a private lender rather than a bank. Also known as bridge loans or rehab loans, they are ideal for financing real estate investments like flips.
Here are some key features of hard money loans:
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Collateral: The property being purchased serves as collateral for the loan.
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Short term: Hard money loans are designed to be paid back quickly, usually within 6-12 months.
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Higher interest rates: Interest rates typically range from 7% to 15%.
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Fewer qualifications: Credit score and income are less important than for conventional loans.
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Faster funding Loans can fund in as little as a few days.
By using the property itself as security for the loan, hard money lenders focus less on the borrower’s financial profile and more on the deal itself. If the numbers make sense, the loan will likely get approved.
Hard Money Loan Requirements
While hard money loans are easier to qualify for than conventional mortgages, there are still requirements borrowers must meet:
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Credit score: Most lenders look for a minimum credit score of 600. The better your credit, the lower the rates.
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Down payment: Typically 20-30% down payment required.
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Experience: Most lenders prefer borrowers with some experience flipping houses.
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Exit strategy: A plan for selling the rehabbed home for a profit.
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After repair value: The property’s value after repairs must justify the loan amount.
As long as you have a solid plan and the numbers make sense, hard money lenders are very interested in lending to experienced rehabbers.
Hard Money Loan Terms
Hard money loans provide flexibility not found with conventional financing. Here are some typical loan terms:
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Amount: 50-70% of the property’s after repair value.
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Rates: Usually 8-15% interest.
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Length: 6 months to 3 years (most commonly 12 months).
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Prepayment penalties: Most hard money loans can be paid off early with no penalties.
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Origination fees: Usually 2-5% of the loan amount.
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Points: 0-5 points may be charged.
Always compare loan terms, fees, and rates from multiple lenders before committing to find the best deal.
The Benefits of Using Hard Money Loans for Flipping
Using hard money loans to fund real estate flips offers some major advantages compared to traditional financing:
Speed
Hard money lenders can approve loans in a few days and fund in a week or less. When flipping houses, speed and agility are critical to securing great deals before anyone else. Hard money’s fast timeline lets you act quickly.
Easier Qualification
With hard money loans, lenders focus on the deal/property rather than the borrower’s finances. If the property makes sense as a successful flip, that’s what matters most. You still need a decent credit score and rehab experience, but it’s a much lower bar to clear than with conventional mortgages.
Purchase and Renovation Funding
A single hard money loan provides the capital to both purchase a property and complete renovations prior to selling. No need to coordinate separate loans.
Flexibility
You don’t have to wait for a traditional 30-year mortgage to mature before paying off the loan or selling the property. Hard money loans are designed to be paid off as soon as the home is resold.
Lower Down Payments
While still 20% or more, hard money loan down payments are lower than the standard 20-25% required from conventional lenders for investment properties.
Use Other Properties for Collateral
Some lenders may accept other real estate assets as additional collateral for a hard money loan, opening up more possibilities.
Risks and Downsides of Hard Money Loans
Hard money loans provide amazing flexibility and speed for flipping houses, but there are some potential downsides to consider:
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Higher interest rates – Often 2 to 3 times higher than conventional loan rates.
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Upfront fees – Origination fees from 2% to 5% are common. There also may be appraisal and other fees.
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Short terms – The loans must be paid back quickly, usually within 12 months.
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Prepayment penalties – Some hard money loans do charge penalties for early repayment.
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Strict foreclosure terms – If you default, the lender can foreclose quickly.
While hard money loans have higher costs, experienced investors factor these costs into the deal. The ability to move quickly and the easier qualifications more than offset the higher rates and fees.
Where to Find the Best Hard Money Loans
Now that you understand the power of hard money loans for financing real estate flips, how do you find the right lender? Here are some options to consider:
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Mortgage brokers – An experienced broker understands hard money loans and can shop multiple lenders.
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Direct lenders – Many hard money lenders work directly with borrowers. Research lenders active and licensed in your area.
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Real estate investor networks – Connect with other local rehabbers to get referrals to lenders they have successfully worked with.
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Online search – Search for terms like “hard money loans [your city]” to find active local lenders.
Take the time to evaluate multiple lenders by comparing interest rates, terms, fees, and borrower requirements. A great lender is key to getting access to funds quickly and cost effectively.
Our Top Hard Money Lender Picks
Based on extensive research, here are my top recommended lenders for hard money loans:
Lima One Capital – Best overall lender for hard money loans. Offers loans from $75k to $3M in over 40 states. Super fast funding and great customer service.
Citadel Servicing Corporation – Top regional lender focused in the Western U.S. Competitive rates and knowledgeable team.
LendingOne – Online hard money loans up to $5M. Loans preapproved in 24 hours. Operates in most states.
PeerStreet – Top pick for accredited investors looking to participate in hard money lending. Earn 9-12% returns backing experienced flippers.
Ready to Use Hard Money to Fund Your Next Flip?
Hard money loans provide real estate investors and house flippers with fast access to short-term capital for purchasing and renovating properties. Their speed, flexibility, and easier borrower requirements give investors a major competitive advantage.
However, higher rates and shorter repayment periods do involve additional risk compared to conventional mortgages. Be sure you run the numbers carefully and have a solid exit plan before using hard money loan financing.
If used strategically and selectively by experienced rehabbers, hard money loans can be an invaluable tool for executing profitable flips. They allow you to move nimbly to secure great deals and complete projects rapidly. This agility and velocity translates directly into higher returns.
So now that you understand the power of hard money loans, it’s time to start putting them to work funding your next successful flip! Let the hard money fuel your real estate investing.
Crowdfunding
Crowdfunding relies on a group of individuals and institutions to collectively finance loans. Each lender, called an investor, supplies a small percentage of the borrower’s loan and earns interest on that money.
Traditional crowdfunding sites like Prosper aren’t geared toward buying and flipping houses. Prosper’s maximum loan amount of $50,000 is intended for projects like home renovation, debt consolidation, and small-business funding. That’s where specialty crowdfunding sites for residential real estate flippers come in. Some will prefund your loan, meaning the company will quickly close your loan using its own money while it waits for investors to put up funding. Others wait for the investors to put up the funding first, which could mean a slower closing.
Where to Look for Lenders
In 2022, the U.S. had a modest decline in the average profit margin from house flipping, an effect of a softening market on the heels of rising interest rates. In 2023, according to Attom, house flipping profitability continued to plummet. In 2023, mortgage rates almost tripled from the lows in 2021, significantly increasing the cost of borrowing, which affects the prices you can sell at and how much you need to pay for your loans from flipping.
One place to find a hard money lender is online. For example, Lima One Capital works with new flippers and lends up to 92.5% of loan-to-cost (LTC) or up to 75% loan-to-ARV. Fees and interest rates decrease the more experience flipping you have. Lima One lends in most states, with rates and fees varying by state. Borrowers with credit scores lower than 680 can borrow slightly less and pay the highest costs. The minimum credit score is 660. Also, Lima One Capital requires a 10% down payment and offers repayment terms of up to 24 months.
Closing costs vary depending on the lender. Expect origination fees between 1.5% and 5% (or more), depending on the projects scope, and an interest rate between 3% and 6.5% and up, depending on your credit score and other factors.
Another firm, Kiavi, offers fix-and-flip loans for up to 90% of the purchase price and 100% of the renovation costs. You need to submit bank statements to show you can cover the down payment and closing costs. Other requirements include a purchase contract, a list of past fix-and-flip projects, property documentation, and the down payment.
Hard Money Lenders Explained – How To Properly Find & Utilize Them
FAQ
How does a hard money loan on a flip work?
What loan do house flippers use?
What is hard money vs fix and flip loans?
Do hard money lenders consider flipping houses?
Hard money lenders consider several factors when evaluating a loan application. This includes not only the down payment but also the borrower’s ability to repay the loan. Hard money lenders value the borrower’s experience in flipping houses and are more likely to approve a loan for a borrower who has flipped several properties.
Do banks provide loans for flipping houses?
Although traditional banks may not offer loans for flipping houses, investors should seek out hard money lenders. Hard money lenders specialize in loans for flipping houses.
How do I get a hard money loan for a flip?
To obtain a hard money loan for a house flip, a hard money lender looks almost exclusively at the investment potential in your project, not your finances. Your investment property becomes collateral on your loan, so if you don’t repay your debt, the lender will take the property.
How can I finance a house flip?
To finance a house flip, you may consider hard money loans. These 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.