Hard Money Loans: Financing House Flipping - Lendinghome

Published Nov 12, 21
4 min read

Get To Know The Pros And Cons Of Hard Money Loans



As of the second quarter of 2021, interest rates on mortgages are historically low, but you will need strong credit to be approved. Key Takeaways It generally costs more money to flip a house than to buy one as a home. Lenders see flipping as a risky proposition and generally won't work with inexperienced flippers.

Flippers may try crowdfunding sites to finance their investments. If you are trying to save money to buy a fixer-upper to flip, bear in mind, you will need to cover not only the mortgage cost but renovations, taxes, insurance, and utilities, until you sell the home. The Costs of Flipping Homes While buying, fixing, and quickly reselling properties can be lucrative, it takes much more money to flip a house than it does to buy a house in which you want to live.

Even if you qualify for a loan with a down payment, you’ll pay more when you’re borrowing to finance a flip than when you’re borrowing to buy a primary residence. That's because lenders see flipping as a riskier proposition. Further, many lenders will not work with inexperienced flippers. They will want to see that you have a successful track record of selling at least one home for a profit.

Get To Know The Pros And Cons Of Hard Money Loans

Hard Money Loans Experts disagree on how hard money got its name. Some say it refers to the fact that it is much more expensive than traditional financing and has “harder” terms. Others say it’s because it finances houses that are “hard” for conventional lenders to finance. Still, others say the term describes the collateral for the loan, as in a hard asset, which, in this case, is the real estate.

A point is equal to 1% of the loan amount, so if you borrow $112,000 and the lender charges two points, you would pay 2% of $112,000, or $2,240. Rather than pay points at closing, as you would with a conventional mortgage, you may not have to pay points until the home sells with a hard money loan—the one soft thing about this hard money.

But if the home does sell for $160,000, you’re looking at a $48,000 profit, minus taxes, for six months of work, potentially without writing a single check from your bank account. Most hard money lenders expect interest-only payments monthly while the loan is outstanding, but some may allow the interest to accrue and not require it to be paid until the flip is complete.

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Hard Money vs. Conventional Loans Lucas Machado, president of House Heroes, a group of real estate investors that flips houses in Florida and finances hard money loans, says hard money loans are easy in another way: The lack of bureaucratic red tape. Unlike conventional banks, lenders aren’t bound by guidelines regarding the shape of the real estate.

Hard money lenders, on the other hand, expect to lend on houses in disrepair,” Machado says. Rather, “hard money lenders decide whether to make the loan by evaluating the strength of the deal and the reliability of the home flipper,” Machado says. If the purchase and repair cost vs. the resale value makes sense and the home flipper is trustworthy, a hard money lender will make the loan.

In some cases, they may want to see an applicant's documents such as tax returns, bank statements, and credit reports. Nor do they care if down payment funds are borrowed (another difference to conventional lenders). After all, “Should the flipper default, the hard money lender can foreclose, take ownership of the house, and sell it profitably on their own,” Machado notes.

Hard Money Loans: Financing House Flipping - Lendinghome

Still, the borrower will be the owner and hold the deed, explains Mat Trenchard, acquisitions manager with Senna House Buyers, one of the largest house-buying companies in Houston. Where to Look for Lenders One place to find a hard money lender is online. For example, Lima One Capital will work with new flippers and lend up to 90% of loan-to-cost or up to 75% loan-to-ARV.

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Lima One lends in most states with rates and fees varying by state. Borrowers with credit scores lower than 680 will be able to borrow slightly less and will pay the highest costs. The minimum credit score is 660. Also, Lima One Capital requires a 10% down payment and offers repayment terms of up to 13 months.

Expect to have origination fees anywhere between 1. 5% to 5% (or more) depending on the scope of the project, and an interest rate between 3% and 6. 50% and up, depending on your credit score and other factors. A second example comes from Lending, Home. This firm offers fix-and-flip loans for up to 90% of the purchase price and 100% renovation costs.

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