Fix and Flip Loan
Real estate flippers who want to renovate, flip, or sell a property with a higher price can benefit from a fix-and-flip loan. The loan term is usually between 12 and 24 months, depending on how extensive the renovation is. LTC or Loan to Cost is a calculation that determines the amount of a borrower’s eligibility for a loan. The equation for qualifying after the Renovation Value (ARV) has. Typically, this will be between 65% and 80% of your ARV. Lenders can charge interest on the entire loan amount, also known as “Dutch Intense.” Lenders may also charge interest on disbursed funds. Other factors impacting the terms and rates a lender offers include FICO, loan amount, location, and other factors. A quick closing is essential in the Fix and Flip market. You can use hard money to get cash quickly and to help you compete with cash offers.
What is a Fix-and-Flip Loan?
Fix N Flip loans, renovate Property, and then sell it at a higher price. An experienced flipper will usually get better terms than a new or first-timer. For example, a professional investor might offer a 90% purchase price and 100% renovation terms. A new or first-time investor can get a discount of 80% or even 85% on the purchase price.
There’s no need to be alarmed! There is no need to worry!
These loans don’t require income/employment calculations, tax returns, or calculation of debt-to-income ratios.
1. What is LTC?
Real estate investors looking to buy, renovate, and then sell their Property in a relatively short time frame, typically 12-24 months, can use a Fix and Flip loan. Private and hard money lenders can finance distressed or in-need properties.
LTC (Loan to Cost) is an equation that determines the amount of a loan a borrower is eligible for.
Example:
If you are applying for an $800,000.00 Construction Loan and your Total Project Cost is $1,000,000, then the Loan To Cost would equal 80%. $800,000/$1,000,000 * 100 = 80%)
Currently, fix and flip lenders lend between 80-90% of total project costs. It includes the purchase price and rehab budget.
2. What is an ARV?
ARV stands for After Renovation Value. Lenders typically lend between 65% and 90% of your ARV. If you own a home that you intend to flip and plan to sell at $1,000,000 after the renovations are complete, your maximum loan amount at 65% ARV would be $650,000.
Example:
If you can find a lender willing to give you 80/100 for a fix-and-flip loan, and you purchase the Property at $700,000.00 and do $100,000 of rehab, your total loan amount would be $660k plus closing costs.
$700k * .80 = $560k
+ $100k rehab
= $660k.
A lender offering 65% ARV for the same $1,000,000 sale price will not work. However, a lender offering 70% ARV will.
It should be taken into consideration when you are determining your budget and looking for the right lender.
What is the interest rate?
Lenders can charge interest on the entire loan amount starting from day one. Lenders may also charge interest on disbursed funds. It could significantly affect the amount the lender pays back over the term of the loan. It is another reason to account for it when you create your budget.
What is the process of reimbursement draws?
Most lenders do a reimbursement draw. After the work, the lender will reimburse you for the renovation costs. If you have paid $10,000 to your contractor to build a kitchen, the lender will approve the work and reimburse you for the costs. Although there are lenders that will loan the money, this is rare. Lenders will often lend money based on your track record and the number of completed projects.
Keep in mind the draw fees charged by your lender. To avoid excessive draw fees, limiting your draws to 4 to 5 projects is a good idea.
What’s your level of experience?
The critical factor determining the terms and rates a lender will offer is your project experience. Your experience in flipping houses is more important than your credit score and other factors that can affect the terms of a loan.
When it comes a time, there will be a range of lenders to determine how much experience you require for their top-tier programs. A minimum of one flip at the same project value can help you get a significant jump in LTV and rehab amount. You may top tier if you have five flips within two to three years. Others will require 20 flips within two to three to three years. You will usually pay less down and get better interest rates. It can also help to lower the origination cost of your loan. Every lender has a different tier, so read their guidelines.
How long does it take for them to close?
It is very competitive in the Fix and Flip market, so it is essential to close quickly. You’ll want a quick and easy closing in many cases to beat the competition. I’ve seen flipper loans closed in as little as 3-5 days by lenders, while others have taken up to 3 weeks. A lender who can work quickly and efficiently can make a big difference in helping you get the Property you want.
Types of hard money loans
1 (1) Fix and Flips and Commercial Value Adds
Flipping and fixing properties, value additions, and other distressed properties can make it difficult for traditional lenders like banks to finance them. These properties are also inherently risky. It is an example of how hard money loans could be.
Construction projects are typically short-term. Hard money loans for construction are usually for 18 to 36 months. Hard money construction loans can pay for labor, materials, and land purchases.
2 (2) Unit Residential Purchase and Cash Out Hard money Loans
Because of their speed, hard money loans can often quickly purchase 1 to 4 unincorporated residential properties.
Many investors also use the property equity by “cashing out,” which is putting a lien on the Property to receive cash proceeds.
3 (3) Commercial Hard Money Loans
Hard money loans are also for multifamily apartments, commercial, industrial and retail properties, and many other types of Property.
1 Term
The terms for hard money loans range from 12-36 months to longer, depending on the case. They are often structured with interest-only payments so that the loan balance is over the loan term—instead, a balloon note for the total loan balance at the end.
2 Rates
Hard money lenders charge higher rates and fees than traditional loans. Rates, for example, are usually between 7% to 12% but can vary depending on the type of Property, use, location, and LTV.
Home Loan Rates
3 Fees
Hard money loans usually have 2-4 origination fees. One origination point equals 1% for a loan of $500,000, while one origination point equals five thousand dollars.
Loan-to-Value (LTV)
LTV (Loan To Value) is a critical way hard money lenders can secure loan repayments because of the lending decision on the asset. A borrower will typically need to put down at least 20% for a purchase and a minimum of 20% for a refinance. They must also retain between 20-25% equity in the Property.
Property Valuation
The next step after a term sheet is property valuation. A broker price opinion (BPO), or an independent appraisal, will generally determine the value. If the LTV is below 50-60%, a hard money lender may do a “drive-by” appraisal to verify that the Property is in good condition and conforms with their internal valuation system.
Exit Strategy
Hard money loans are interest-only loans that do not pay the principal balance. It means there will be a large repayment at the end. It is not a problem, as savvy investors and top hard-money lenders will require an exit strategy before finding a hard-money loan.
The permanent financing that replaces the bridge loan is called a takeout loan.
Selling the Property is another way to get out of a hard-money loan. This strategy is known as fix n flipper. The plan involves purchasing and renovating a distressed property using financed funds. After the renovations, you can sell the Property for a profit. However, a flipper can rent the Property instead of buying it. In this case, Traditional lenders will be more likely to finance the Property once the Property has been turned-key and there are renters lined up.
A reliable source of hard money funding should be part of every well-equipped borrower’s toolbox. While banks may be able to offer lower rates, banks do not provide hard cash loans. Their loan programs are more flexible than those offered by hard money lenders. Traditional lenders also have loan committees and require more detailed underwriting, so it’s common for them to delay the loan process. Hard money loans are a bridge for borrowers who have tried other types of financing. It is why hard money loans are so popular.
- Two main reasons to get hard money loans
- Speed: Same as Cash Purchasing Power
The speed of hard money loans is one of their main advantages. Hard money loans are much faster than traditional loans and can close in as little as 1-2 weeks. Sometimes, even quicker. Many top hard money lenders can make their underwriting decisions quickly and issue a term paper within the first call. Some even fund loans within 24 hours! Hard money loans are outstanding for those who need a fast close and minimal documentation.
Temporary Financing Needs
Hard money loans are quicker and easier than conventional loans. There are two main types of temporary financing situations where hard money loans can make sense:
(a). Property must be stabilized.
Property Stabilization/ Fix and Flips/ Construction
For situations where the Property needs renovation, hard money loans can be a great option. These can include cosmetic improvements, full-scale renovations, and even rebuilds. Traditional lenders base their funding decisions on a property’s current value, which is a problem for borrowers in these cases.
Hard money lenders, on the other hand, will base their funding decisions at least partially on the Property’s future value after renovation value (“ARV”). Because they are more cautious and have higher rates, hard money lenders will lend on the Property’s riskier future expected income.
A classic example of a situation where a hard money loan is financially sensible is Fix and Flips—the loan on the Property’s value after renovations. After the Property has been fully rehabbed and is stable, the hard money loan can either be repaid with a traditional lender or sold to a buyer who supports the loan’s value.
(b). The financial stability of the borrower
Borrower Finances could be better.
Hard money lenders tend to be less concerned about credit issues like foreclosures, bankruptcies, and late mortgage payments. They also have fewer strict underwriting guidelines.
Sometimes a borrower may be unable to provide the documentation traditional lenders require. It could be due to their business’s nature or because tax returns might need to reflect the current financial situation accurately.
If there is sufficient equity in the Property or the borrower has enough capital to pay the debt, hard money lenders will be willing to overlook credit problems.
Hard money lenders don’t usually require tax returns or information about income and employment. Some hard money lenders will only refinance Property if substantial equity is left after the hard money loan.
Real estate investors have a powerful tool: a fix-and-flip loan. These loans are flexible and quick, offering the same purchasing power as cash. A fix-and-flip loan is the best option for financing renovations and other value-add projects. LTC is Loan to Cost, which calculates the loan amount that a borrower can qualify for. A lender’s rate and terms depend on the project experience. It is essential to close quickly because the Fix and Flip market can be competitive. There are three types of hard money loans: Fix and Flips and Commercial Value Adds. Construction Loans are also available. You can also purchase 1-4 units of residential Property, cash out hard money loans, and commercial hard money loans. Temporary financing and speed are the main reasons you should use hard money. Call us today to learn more about our valor hard cash mortgage loans!
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