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Fix-and-Flip Loans

Fix-and-Flip loans are short-term financing tools designed for real estate investors. They provide the capital needed to purchase a property, complete renovations, and sell it for a profit, typically within 6 to 24 months.

Also known as hard money or rehab loans, these are asset-based loans, meaning the lender's primary consideration is the property's value after renovations are complete (the After Repair Value, or ARV). Because they are designed for speed and flexibility, lenders can fund deals much faster than traditional banks, allowing investors to seize opportunities quickly. These loans typically cover a percentage of both the purchase price and the renovation budget.

Fix-and-Flip loans are ideal for investors who need to move fast and require financing for both acquisition and construction. They are available for a wide range of non-owner-occupied residential properties.

A Fix-and-Flip loan is a short-term financing instrument used by real estate investors to fund the purchase and renovation of a property that they intend to sell for a profit. Unlike traditional mortgages, which are based heavily on a borrower's personal income and credit, these loans are secured by the asset itself. Lenders evaluate the deal's potential profitability, focusing on the property's After Repair Value (ARV). The loan typically includes funds for the initial purchase and a separate construction reserve that is paid out in draws as renovation milestones are met.

Fix-and-Flip loans are designed for real estate investors, not owner-occupants. Eligibility is primarily based on the quality of the investment deal and the borrower's ability to execute the project. While requirements vary by lender, they typically assess the following:

  • Real Estate Experience: Lenders prefer borrowers with a track record of successful flips, though programs exist for new investors.
  • The Deal's Viability: A strong proposal with a clear budget, timeline, and a solid After Repair Value (ARV) is crucial.
  • Credit Score: While more flexible than conventional loans, lenders still look for a reasonable credit history (typically 620+).
  • Liquidity: Borrowers need to show they have cash reserves ("skin in the game") for the down payment, closing costs, and to cover unexpected expenses.
  • Legal Entity: Many lenders require the borrower to hold the property in a business entity, such as an LLC, for liability protection.

These loans are intended for non-owner-occupied, residential investment properties. The goal is to find a property with potential for a significant increase in value through renovations. Eligible property types typically include:

  • Single-Family Residences (SFR)
  • Duplexes, Triplexes, and Quadplexes (1-4 unit properties)
  • Condominiums and Townhouses
  • Distressed properties, foreclosures, or REOs (Real Estate Owned by banks)

The key factor is that the property is being purchased as an investment to be repaired and sold.

  • Speed to Close: Funding can be secured in days or a few weeks, compared to months for traditional loans.
  • Financing for Renovations: Loans can cover up to 100% of the rehab costs, preserving your cash for other needs.
  • Leverage: Allows you to use less of your own capital per project, enabling you to take on multiple deals at once.
  • Flexible Underwriting: Lenders focus on the asset's potential (ARV) rather than solely on your personal income.
  • High Loan-to-Cost (LTC): Many lenders will finance up to 90% of the purchase price and 100% of the renovation costs.

You can apply for a Fix-and-Flip loan with a private or hard money lender that specializes in investor financing. The process is focused on the property and your plan:

  • Submit a Loan Application: Provide basic information about yourself, your business entity (if any), and your real estate experience.
  • Provide Deal-Specific Documents: This is the core of your application. You'll need:
    • Signed Purchase and Sale Agreement for the property.
    • Detailed Scope of Work (SOW) or Rehab Budget.
    • An appraisal or broker opinion of value that supports your proposed After Repair Value (ARV).
  • Submit Financial Information: You will need to provide documents like bank statements to verify liquidity and a personal financial statement.

Fix-and-Flip loans have a different structure than traditional 30-year mortgages. Understanding these terms is key:

  • Loan Term: Short-term, usually ranging from 6 to 24 months.
  • Interest Rates: Higher than conventional loans, reflecting the higher risk and short-term nature of the loan.
  • Payments: Typically structured as interest-only payments for the duration of the loan, with the full principal balance (a "balloon payment") due at the end of the term when the property is sold or refinanced.
  • Points & Fees: Lenders charge origination fees, known as points (1 point = 1% of the loan amount), in addition to standard closing costs like appraisal and title fees.
  • No Prepayment Penalty: Most fix-and-flip loans do not have penalties for paying the loan off early, as a quick sale is the goal.

  • Higher Costs: Interest rates and origination fees (points) are significantly higher than those for conventional loans.
  • Short Repayment Period: The loan must be repaid quickly, which puts pressure on completing renovations and selling the property on schedule.
  • Market Risk: If the real estate market declines, you may not be able to sell the property for the projected ARV, impacting your profit or leading to a loss.
  • Budget Risk: Renovation costs can easily exceed the initial budget due to unforeseen issues, and you are responsible for covering these overages.
  • Default Risk: Because the loan is asset-based, if you default, the lender can foreclose on the property quickly to recoup their investment.