If you’re wondering how to finance a house flip, you’re not alone. Buying, renovating, then quickly reselling houses for profit can be a highly lucrative endeavor, yet finding a loan to fund such a project isn’t anything like getting a conventional loan for a home you intend to actually live in.
In fact, there are six types of “fix-and-flip loans” you can use to buy and renovate distressed properties, and each comes with its own set of qualification requirements and pros and cons. Here’s a look at five options and how to figure out which one’s best for you.
1. Hard-money loan
Hard-money loans, sometimes called “rehab loans,” are short-term loans intended for real estate investments. Unlike traditional bank loans, these are issued by private lenders. A hard-money lender can be an individual, a group of investors, or a licensed mortgage broker who uses personal funds to extend the cash.
Hard-money loan terms are usually much shorter than traditional mortgages. Six months to one year is most common, but they can go up to five years. Interest rates are considerably higher, typically ranging from 12% to 21%. Most hard-money lenders also charge 3 to 6 points upfront, where 1 point equals 1% of the loan.
Down payment requirements for hard-money loans are also different. You can expect to receive about 60% to 75% of the property value you intend to purchase. If you’re looking at a $200,000 property, for example, the most you’ll probably be allowed to borrow would be $150,000, meaning you’d have to pay $50,000 upfront.
However, hard-money lenders are generally more willing to accommodate people with lower credit scores (as low as 550). And there’s much less paperwork than a traditional loan, so the process is faster—sometimes as fast as one week. Because the home being purchased is serving as collateral, hard-money loans are best suited for people who have flipped at least two to three homes.
2. Cash-out refinance
If the value of your primary residence has increased, one financing option for your flip is a cash-out refinance. This lets you tap the equity in your home by refinancing your mortgage for more than you currently owe and taking the difference in cash.
As the name suggests, you are in effect “cashing out” some of the equity in your home to pay for something else. Your new loan will be the amount you still owe on your mortgage plus the cash you wanted to take out. So, say you had a $300,000 loan, on which you still owed $200,000. That would mean you had…