A fix-and-flip loan is a short-term financing option for people who want to purchase a property with the intent of selling it in the future for a profit.
Lenders usually require borrowers to have a lower loan-to-value (LTV) ratio for a house-flipping loan than they would for a mortgage on the home they live in – which means a larger down payment is necessary.
A borrower may be able to get a fix-and-flip loan with no money down by offering additional collateral or finding a guarantor for the loan.
Aside from a fix-and-flip loan, you may also finance a house-flipping project by working with a private investor or using a home equity agreement on another property.
If you are new to house flipping, and have limited resources, you may be wondering if it’s possible to get a loan with no money down. Here, you’ll learn about some options, in addition to alternative fix-and-flip financing methods.
A fix-and-flip loan is a short-term financing option that real estate investors use when they want to purchase, renovate (fix), and then quickly resell (flip) a property to generate a profit. The loan provides borrowers with the capital necessary to purchase the home.
The precise terms of a fix-and-flip loan will vary from lender to lender. However, qualifying terms may depend on the following factors:
Your relationship with the lender
Your experience (Your first fix-and-flip loan may have less favorable terms because of the perceived increased risk to the lender.)
The market you’re buying into
The nature of the proposed renovation
The projected value after you renovate the home
Lenders typically view fix-and-flip loans as risky propositions. To hedge against such risk, they are more conservative in the loan-to-value (LTV) ratio they give a borrower. An LTV ratio is ratio of the loan amount a lender will provide to the appraised value of the property they intend to purchase with the loan.
For example, the LTV of a conventional mortgage is usually around 80%. The borrower provides the remaining 20% needed to purchase the property in the form of a down payment. With a fix-and-flip loan, lenders may only award an LTV ratio of 65-70%, which means the borrower must come up with 30-35% of the property’s value as a down payment.
Obtaining a fix-and-flip loan with no money down is difficult because of the lower LTV lenders apply to these types of loans. However, one method to come up with the additional cash needed for the down payment is to offer additional collateral (other than the fix-and-flip property) as a security interest in the event you default on the loan. The property you use as collateral will need to have a value that matches (or exceeds) the value needed for the down payment money. Examples include:
Other real estate, such as your primary residence
Any other item of significant value
As an alternative, a borrower may be able to find someone to guarantee the loan. As a guarantor, that person agrees to pay the debt of the borrower in the event of a default on the fix-and-flip loan.
This video explains two ways to get 100% financing (i.e., no money down) with a fix-and-flip loan.
Borrowers may consider other financing options, beyond a fix-and-flip loan, to fund their project.
Find a private investor
House flippers may be able to sidestep getting a fix-and-flip loan by working with a private investor. The private investor provides the capital to fund the house flipping project. While you may circumvent working with a lender, partnering with a private investor may create additional issues. For instance, you may need legal help to establish an agreement outlining the rights and obligations for your investor and you. Raising capital this way can also mean forfeiting some of your control and decision-making authority on the project.
Obtain a home equity agreement
Another option for house flippers who own their own home and have equity in it may be a home equity agreement (HEA). A HEA allows you to sell an interest in the home to a provider in exchange for cash proceeds. The amount you can receive will depend on your home’s value and the amount of equity you have in it.
Benefits of using funds from a home equity agreement include:
No additional loans (which means no monthly repayments of principal and interest)
Flexibility in repayment
Lower credit score minimum requirements compared to traditional loans
The term of an HEA is typically 10 years, which gives you a couple of options for repaying the HEA provider. One is to sell the home within that period and repay the provider’s equity percentage with the proceeds. The other is to buy out the ownership interest at any time during the term of the agreement. The HEA provider would obtain an appraisal of your home’s fair market value to determine the buyout amount based on its ownership interest.
Choosing a financing method for your next house flipping project requires careful consideration of your finances and business plan. Options do exist for getting a fix-and-flip loan with no money down, such as by increasing your offer of collateral or finding a guarantor. For alternatives to fix-and-flip loans, you may be able to work with a private investor to fund the project – or consider a HEA.
Contact Unlock today about a home equity agreement for your next fix-and-flip project.