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Fix-and-Flip Loans: What They Are and How They Work

Published on: May 2, 2022

fix and flip loans

A fix-and-flip loan is short-term funding that real estate investors use to buy a property that they fix up and resell for a profit. This is known as “house flipping.” Fix-and-flip loans can include funding for the property and renovation expenses. 

Fix-and-flip lenders generally charge higher interest rates than conventional lenders, and may have shorter repayment terms and conditions. The best fix-and-flip loan will depend on each borrower’s unique needs and project plans.

What’s the best fix-and-flip loan for me?

A fix-and-flip loan can be a great option if you’re looking to purchase, fix up, and then sell a property — ideally, at a profit. With these types of loans, you can use OPM (“other people’s money”) to fund your project while keeping your own cash reserves available in case you need them. Fix-and-flip loans typically come with higher interest rates, but they also provide short-term funding with reasonable borrower requirements. 

The right fix-and-flip loan for you will depend on your project as well as your financial situation. Lenders each have their own borrowing requirements and financing coverage, so it’s important to shop around with multiple lenders.

How much house-flipping financing do I need?

Lender financing requirements for fix-and-flip home loans differ from conventional mortgages.  

Generally, short-term lenders will offer funding based on a property’s estimated after-repair value, or ARV, rather than just its purchase price. You might be able to finance up to 100% of your purchase price and estimated repair costs instead of needing to make a significant down payment. 

Consider following the 70% rule when figuring out how much you should spend on a fix-and-flip home. This rule states that borrowers should pay no more than 70% ARV after subtracting repair costs.  

For example, if an investment property will be worth $300,000 — after putting in $50,000 worth of repairs — you shouldn’t pay more than $175,000 for it. 

  Fix-and-flip loan 
Projected ARV   $300,000 
Repair costs  ($50,000) 
70% rule  $250,000 x 0.7 = 
Suggested maximum purchase price  $175,000 

 

When calculating your financing needs and realistic loan options for an investment property, make a list of all the costs involved. This includes acquisition costs, renovation expenses, permits, new inspection and appraisal fees, and real estate commission fees.

Fix-and-flip loans for beginners and first-time homebuyers

If you’re interested in funding your first fix-and-flip, you may find it tricky to get started. Without a sizeable down payment, assets such as home equity, or a history of successful real estate investments, you might have a more challenging time getting approved for a fix-and-flip loan.

Each lender has its own requirements, but the best loan terms are generally reserved for borrowers with five or more flips under their belt, a good credit score, and solid sources of liquidity.

Hard money loans are some of the most popular for the investment property crowd, and are generally accessible to first-time investors who have strong credit. Each lender has its own rules regarding maximum loan amounts and credit score requirements, though they can generally get you funded in about a week (if not less).

If you don’t have the experience, assets, credit score, or minimum down payment to get approved for hard money loans, finding a partner investor is another option. With a partner investor, you can negotiate every aspect of the arrangement, and there are no hard-and-fast requirements as far as experience or credit score are concerned.

However, a partner will likely want to split the proceeds of the flip with you. After all, the partner is providing the funding and taking on the bulk of the risk. Be sure that you’re bringing something to the table — whether that be contracting skills, experience in a specific market, etc. — to convince a private partner lender to give you the cash for your first flip.

Here’s a look at how hard money loans and private money loans compare.

  Hard money loans  Private money loans 
Time to close  5-10 business days, on average  Can be immediate 
Estimated rates  Around 10% to 15%, on average  0% and up (varies by partner) 
Fees  Origination and appraisal fees, closing costs  None required 
Minimum credit score  Varies; some lenders may not have a requirement  None required 

 

Fix-and-flip loans with no money down

Crowdfunding platforms give investors the opportunity to take out fix-and-flip loans with no money down (or a smaller down payment). With crowdfunding, you’ll have access to a network of investors with capital, ready to put money into your project. In turn, you can combine peer-to-peer lending with private loan options to fund your fix-and-flip.

Crowdfunding platforms all have their own rules regarding down payments, credit score requirements, and closing timeframes. You may be able to get a 0% down loan, if needed, or even snag funding with a less-than-perfect credit score if you have sufficient assets or experience.

Crowdfunding loans can have higher interest rates than traditional mortgages. You may also need to prove that you have a certain level of assets in order to qualify. For example, a lender platform may want to see that you have $20,000 to $30,000 in liquid assets before approving a new loan request.

Here’s an overview of how crowdfunding works. 

Crowdfunding 
Time to close  As few as four days 
Estimated rates  Varies by lender, but expect around 8% 
Fees  Origination fees and closing costs 
Minimum credit score  700+ is common, but it varies by lender 
Minimum down payment  Varies by platform 

Fix-and-flip loans for bad credit and no credit check

If you have bad credit, there are two fix-and-flip loan options to consider: bridge loans and the FHA 203(k) rehabilitation loan. A bridge loan provides short-term financing to borrowers, either until they can secure more permanent funding or until the project is complete.

Bridge loan requirements will vary from one lender to the next. Some bridge loan lenders may require you to meet the same underwriting requirements as a standard home mortgage, while some lenders don’t require a credit check, a minimum credit score, income verification, or any prior real estate investment experience.  

If you have bad credit and are considering a bridge loan, shop around with multiple lenders. Bridge loans tend to have higher interest rates and steep closing costs that can be as much as (or more) than those of a traditional home loan. 

With an FHA 203(k) rehabilitation loan, borrowers with credit scores as low as 500 can borrow between $5,000 and $35,000 for a fix-and-flip. There are no income limits to qualify for a 203(k) loan, and down payment requirements are as low as 3.5% of the loan amount with a credit score of 580 or higher. There are origination fees and other costs involved with a 203(k) loan, as well.

Here’s a closer look at how bridge loans stack up with FHA 203(k) loans. 

  Bridge loan  FHA 203(k) rehabilitation loan 
Time to close  2-45 days, depending on the lender  May take longer than a traditional FHA loan 
Estimated rates  6% to 10%  Higher than standard FHA rates 
Fees  Standard closing costs (which may include origination fees, insurance, and even a percentage of the expected repairs)  Origination, architectural plan, rehabilitation review, and appraisal fees 
Minimum credit score  Varies by lender, may be as low as 500  580 (with 3.5% down) 
Minimum down payment  Typically ranges from 10% to 15%  3.5% (with a credit score of 580+)

 

Fix-and-flip loan FAQs

Here are answers to the most commonly-asked questions about fix-and-flip loans.

What do fix-and-flip lenders look for?  

Though your credit history is evaluated by fix-and-flip lenders, it’s not weighted as heavily as it is with a traditional home loan. Lenders will, however, expect borrowers to have adequate cash reserves, equity in other properties, and, some real estate investing experience. Consult with a local Finance of America Mortgage Advisor to explore your fix-and-flip loan options.

What is the 70% rule in house flipping?  

The 70% rule in house flipping is designed to help investors identify a good investment and determine the maximum price they should pay for a property. The rule states that when buying a property, the purchase price shouldn’t exceed 70% of its ARV, minus renovation and repair costs. 

Can you flip houses with bad credit? 

While bad credit can make it difficult to get a fix-and-flip loan, it’s not impossible. FHA loans, for instance, have a minimum credit score of 500 to 579 with a 10% down payment. However, if you don’t have good credit, expect to put up more capital for the investment, have substantial equity in other properties, or be able to demonstrate previous (successful) house-flipping experience.

Can you flip houses with no money?  

There are many ways to flip houses with no money. Some options include partnering up with another investor, taking out a hard money loan, pulling from existing home equity on another property, crowdfunding, and in some cases, requesting a lease or owner financing. Proceed with caution and do your research, though; these fix-and-flip loan options tend to come with more risk and higher costs than conventional or government-backed loan programs.

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