FNF 101 – How to Get a Fix & Flip Loan
1. Find a Property that Maximizes Profits.
Whether you’re a seasoned investor or a first-time fix & flipper, the first step in getting approved for a real estate investment loan starts with finding the correct property. If you’re not sure where to look you can click on our link for “How to Find Your First House to Flip.”. Fix & flipping properties is the BEST “rinse and repeat” style investment which yields investors hundreds of thousands of dollars per year in most cases!
A. Hard Money / Private Money vs. Conventional Lending.
Since you’re checking out this how-to blog post, I will assume you don’t yet know that hard money / private money loans are the most popular types of funding for professional Real Estate Investors. For the uninitiated, a hard money / private money loan is backed by an accredited lending institution and/or private money lender who specializes in asset-based lending, with an emphasis on closing the deal quickly (2-3 weeks), versus a conventional lending institution who tends to close the deal slowly (30-60 days, on average). Conventional banks also have stricter loan requirements and because “speed to market” is the name of the game, most seasoned investors prefer to work with hard money / private money lenders. With rates ranging from 6.99-10% our clients ALWAYS see a good ROI (Return on Investment).
Most lenders finance up to 75% the ARV (After Repair Value – the retail value of the property once the rehab has been completed). This means that for a $100K loan, the lender would finance up to $75K. So, for you to be covered, the purchase price of the property and the rehab budget combined, could not exceed $75K, assuming you wanted to be financed for the max LTV. Now, if your loan size exceeded the max LTV, you could pony up the difference, but seasoned investors don’t usually opt for that. Instead, they prefer coming out of pocket with as little money as possible. This preserves cash reserves and allows for multiple properties to be purchased and flipped simultaneously, once you get more experienced. iFundRehabs does have a business line of credit / personal loan program available, please mention this to your agent if you are interested! This is an amazing program that helps investors such as yourself come up with the difference OR serve as a cushion in the event of emergencies.
C. The 90/95 Average.
Most lenders also finance up to 90% of the purchase price, and 95% of the rehab. For the average 90/95 lending scenario, this means you would need to provide proof of funds for the difference (10% in the purchase price, and 5% in the rehab) of the total loan amount. Some lenders verify your bank account(s) to see that those funds exist, while others require a bank note/check presented at the time the closing docs are signed. Although 100% financing does exist, it usually comes at the price of splitting profits with the investor, among other costly concessions. iFundRehabs DOES offer 100% fix & flip financing in certain cases, but not all. So always be prepared for 90/95%.
D. Loan Terms.
FNF Loans are usually carried for 9-24 months, but most lenders have refinancing programs available that will allow you to transition into 5-,7-, or 30-year loans, assuming you decide to keep the property as a rent-producing asset (referred to in the industry as a “Buy & Hold,” “Rental Property Loan” or “Rental 360 Loan”).
E. Costs of the Loan:
i. Interest rates on fix & flip loans vary from 4%-18% (and sometimes higher for low/no credit lenders). Payments are usually calculated as interest-only, and with a 3MO minimum. So, for a $100K FNF loan at 4% APR, the yearly interest for carrying a 12MO loan to term would cost $4,000, and you would be on the hook for at least 3 months’ worth of payments, or $1000+ of the accumulated interest.
ii. Points (percentage points) will also be added to the loan and vary from 1 point to 4 points (1% – 4%) of the total loan amount. These are the fees that get paid to the lender/broker/salesman/underwriters and can be any combination of the three.
iii. Additional Loan Costs include the Appraisal/Inspection (On average, $500 for standard delivery in 7-10 days, $650 for expedited delivery in 2-5 days), Title Fee ($500+), and sometimes an Application Fee ($500+), and Closing Doc Fee ($500-$1500), all of which come out of pocket before the loan closes. Most lenders do not allow these fees to be rolled into in the loan. Typically speaking, you will have to spend $3,000 to $4,000 before the loan closes.
iv. Closing Costs usually includes the Origination Fee ($1,500+, or a percentage of the loan total), and an Admin and/or Processing Fee ($450+). The good news is, most of these fees can get rolled into the loan, saving you an additional $3,000+ out of pocket.
2. Get Approved for Funding.
After you’ve selected the perfect single family home, multi-family or mixed-use property, the next step is finding a lender that will fund it for you. At this step, the most important thing you can do is to check online reviews against any prospective lender to ensure they aren’t plagued by delivery hell (not closing on time), or charges of switching (or adding) additional costs to the loan at the midnight hour. In addition to this, you should ALWAYS do your due diligence on the company you’re about to do business with. I can’t tell you how many times clients come to me saying they were out thousands of dollars because they dealt with fraudulent “lenders”.
Once your initial documentation has been accepted (usually the Application, a copy of the Purchase Contract and Scope of Work), you will receive a “Conditional Offer,” “Letter of Interest (LOI),” or something similar, which breaks down the initial terms of the loan, pending approval of you (and/or your business partners) credit score(s), financial documentation, and professional appraisal of the property.
If you accept the offer and countersign its signature page, the lending company will order an appraisal for your property and start the due diligence process of approving you, your company, and ultimately, your loan. At this point they will request additional documentation (ID, bank statements, tax records, LLC/company docs, proof of property insurance, etc.). These docs are the cornerstone of the approvals process for most private money / hard money lenders, and you will have to submit copies of these records each time you want to fund a new fix & flip loan. *For the experienced fix & flipper, we do offer “fix & flip lines of credit” that provide once-a-year approvals, and minimal pipework for each property submitted*
Title work will be ordered (through the lender, or your preferred title attorney), and property insurance will be verified, although some loans build-in property insurance reserves to ensure there is funding available for the duration of your loan.)
Once the Appraisal comes back and you approve the final terms of the loan, closing documents will be drawn up through a 3rd party attorney and sent to the title attorney, for review. Once you sign the closing documents, your funds will be disbursed, based on the terms, within 24-48HRS, on average.
3. Complete the Rehab.
Work is generally done by a licensed General Contractor (or overseen by a licensed GC if you intend to undertake the job yourself). During this time, you will take “draws” from the rehab portion of the loan (and some lenders charge a fee for disbursing each draw), and most lenders allow unlimited draws until the money runs out. iFundRehabs allows for unlimited draws on our fix & flip line of credit. Please consult with your loan officer about the details of your draws when needed.
4. Flip Your Property
After completing your fix & flip loan or line of credit, it’s now time to flip that property for a profit! Many of our clients do 10-20 flips per year, but if you’re just starting out, 5-10 may be your range while you’re getting started.
Thank you for taking the time to read our blog on, “FNF 101 How to Get a Fix & Flip Loan”. We hope to hear from you soon and, as always, happy flipping!
If you have any question about our fix & flip programs, don’t hesitate to CONTACT US anytime! We have some agents who work after hours to take your call OR a 24-hour chat box in the bottom right of your screen!