How to Get Money to Flip a House: Types of Loans
Modern day house flipping became more popular due to the continual rise of home prices in the late 2000s. This boon created new pathways for potential prospects to secure a loan to purchase a house.
While we won’t dive entirely through the process of house flipping like we do here , we will talk about the different ways that you can get money to start your house-flipping journey. Each method may not work for everyone, as the requirements vary.
A Note on Conventional Loans
Typically, the only way you can use a conventional loan to flip a house is if you plan on living in the house (as a primary residence) during a remodel. The loan amount will cover the mortgage, and not money you need for the remodel itself (unless you also have an FHA 203k loan to cover the reno). With slow closings including tons of paperwork and checks, conventional loans are not typically used for short term house-flipping projects.
Although conventional loans may be what you are most familiar with outside of house flipping, there are many other types of loans more fitting for you if it is not your primary home.
Hard Money Loans
One of the best ways to get money to flip a house is through a hard money loan. Otherwise known as fix-and-flip loans, hard money loans are generally short-term loans (6-24 months) and have lower barriers to entry.
They’re also provided by a private business or investor pool who base the loan value on a couple key factors such as purchase price of the property, costs of renovation, and the After-Repair Value.
A hard money loan is typically handled by a hard money lender who uses the property as collateral if the buyer defaults.
Hard money loans are also the most beneficial to those looking to flip a house in the short term.
Home Equity Loans
Also known as a second mortgage, this type of loan leverages the equity of your current home and uses it essentially as collateral. This essentially provides a large amount of money to work with and can be easier to qualify for.
A combined loan-to-value ratio of 80% is what is typically used when determining how much the homeowner can borrow.
As for the downsides to this loan, failing to make payments makes you risk losing your home to foreclosure. Selling your home means forfeiting the entire amount of the debt. There are also additional costs such as closing cost that you will have to pay.
Private Money Loan
A private money loan is another asset-based loan like a hard money loan. Where they differ is the lender themselves.
Generally speaking, “private money” can come from anyone not in the business of providing loans. This can mean a friend, family members, partners, or even acquaintances.
The difficulty with private money loans is acquiring one, as they are not organized institutions. It requires that you network with someone who has or is interested in lending out private loans. Since this person is not in the business of lending, the terms are negotiated between the two of you.
In conclusion, we have gone through some of the more popular types of loans for house flipping funding. As each loan has their own pros and cons depending on the property you’re looking to flip, among other factors, carefully consider which one will be best for your situation.