Fix and Flip Loan Requirements

You find a house that’s offered way below market. There’s enough value in it to fix it up and then flip it for a quick profit.

There’s just one problem: you don’t have the capital to acquire and rehab the property, and a traditional bank or lender won’t touch the deal.

Enter fix and flip loans, short-term loans designed to finance this very situation.

Overview: Fix and flip loans vs. traditional lending

When considering a fix and flip project, navigating financing can be overwhelming.

Traditional lending typically involves a lengthy application process and a focus on the borrower’s credit history. Fix and flip loans rely on the after-repair value (ARV) of the property.

Advantages of fix and flip loans

The biggest advantage to fix and flip fix and flip loans is that a traditional lender won’t finance a home in bad condition.

But these loans are meant for just that, plus offer short-term financing instead of the longer-term loan that a traditional lender expects.

Additionally, fix and flip loans have more lenient credit requirements, making them accessible to a wider range of investors.

Speed of funding

Traditional lending might take weeks or even months to secure funding. Fix and flip loans can often be approved and funded within days. This is a crucial advantage for investors looking to move quickly before a good property is sold.

Fix and flip qualification requirements for 2023

Fix and flip lenders evaluate the property itself instead of the personal finances of the borrower, debt-to-income ratios, income, or the borrower’s employment.

There are, however, other benchmarks that the borrower must meet to qualify.

Loan amount and down payment

The maximum loan amount for a fix and flip loan is determined based on the combined costs of the property, repairs, and the after-repair value (ARV).

Lenders typically finance 80% of the acquisition cost and 100% of the repair costs, requiring borrowers to provide a down payment for the remaining amount plus loan costs.

Verified cash

Before approving a fix and flip loan, lenders require borrowers to verify their available funds for the down payment, closing costs, points, and the first phase of construction. This amount must be in a liquid bank account to ensure easy access and demonstrate financial stability.

Loan length

Fix and flip loans usually have a term of 6-12 months, which aligns with the expected timeline for completing renovations and selling the property. Extensions are available but come at a high cost. Plan your project timeline accordingly.

Experience

To determine the loan terms, lenders consider the borrower’s experience in flipping homes or managing investment properties. More experienced investors may receive better terms due to their demonstrated ability to complete projects successfully.

Credit score

Credit score requirements for fix and flip loans vary by lender. Most look for a solid credit history, ideally with 1-2 years since any foreclosure or bankruptcy events.

While some lenders may have more lenient credit score requirements, maintaining a good credit rating will improve your chances of securing favorable loan terms.

Loan purpose

Fix and flip loans are intended for non-owner-occupied properties only. They cannot be used to finance a property you plan to rehab and hold for rental purposes.

Closing in the name of an entity

Individuals, corporations, and LLCs can all obtain fix and flip loans.

However, corporations and LLCs must provide proper documentation, such as articles of incorporation or operating agreements, to demonstrate their legal standing and authority to enter into a loan agreement.

Property types allowed

Eligible property types for fix and flip loans include single-family homes, condominiums, multifamily properties, and some mixed-use and commercial properties. Verifying the property type with your lender before submitting a loan application is essential.

Minimum and maximum loan amounts

Fix and flip loan minimums and maximums differ among lenders. Some offer loans starting at $75,000 and going up to $2 million and even beyond. It’s crucial to research multiple lenders to find the best fit for your project’s financial needs.

Payment structure

Payments for fix and flip loans are interest-only, meaning borrowers only pay the interest due each month. The principal balance is paid in full when the property is sold, allowing investors to minimize monthly expenses while focusing on maximizing their return on investment.

Prepay penalties

Prepayment penalties typically do not apply to fix and flip loans, as the primary goal is to pay off the loan as soon as possible upon selling the property.

Fees

Borrowers can expect to pay 1-4 points upfront for fix and flip loans, along with processing, underwriting, and other fees, depending on the lender.

Additionally, a draw fee of $100-$200 is charged each time a phase of the project is completed, and funds are requested for reimbursement. If a project extends beyond the initial loan term, borrowers may incur extension fees of 1-2 additional points.

U.S. residency

Some fix and flip loan lenders accommodate foreign nationals, expanding opportunities for global investors to enter the U.S. real estate market. It’s essential to research and compare lenders to find one that aligns with your specific financing needs and residency status.

Fix and flip loans 2023—FAQs

Take the next step

With their flexibility, accessibility, and quick funding, fix and flip loans can be an excellent choice for buyers looking to purchase and renovate properties for profit.

Finally, one of the fundamental aspects of a successful fix and flip project is to find the right lender and get the right advice.