How to get a loan in order to flip a home for the first time

11 Replies

I have recently got a business partner him and I would like to flip a house together. My credit is not too good he will have to get the mortgage in his name and I would supply part of the down payment my first question is is there a contract that I can make that would guarantee my profits for the home once the house sells. My second question is what mortgage is the best if we only want to hold the home for 2 to 3 months in order to rehab and put a maximum of 20% down ideally we would like some sort of traditional loan that would allow us to do this.

@William Decker for your second question, no traditional loans will not give you rehab funds. The bank will take the as-is value of the property (appraised value) so your 20% will go towards the purchase and you have to put your own money for the rehab. For a flip you need a hard money loan, there are some lenders that will allow you to put down 20% and will also give you the rehab funds into the loan. They will require you to prove you have the liquidity to hold the property for a period of time. 

@William Decker  

You with a few restrictions...you have to hold the property for 6 months minimum and the property needs to be in a livable state and the loan must be non-owner-occupied.

What you probably need is a HM loan. They can fund as quick as 2 weeks and give you rehab costs.  Provided everything like comps, rehab costs, etc all checkout.  That is probably your best bet and to have the least amount of money involved.

Originally posted by @Guifre Mora :

@William Decker  

You with a few restrictions...you have to hold the property for 6 months minimum and the property needs to be in a livable state and the loan must be non-owner-occupied.

Not exactly accurate. I think what he means is that most conventional lenders will have a pre-payment penalty of at least 6 months, if not 12 for a non owner occupied loan (which is what you need for a flip). Therefore, most flippers using debt to leverage will use hard money or private money loans.

As to your other question, there is no way to guarantee profits, that is up to how well you do on the purchase, rehab and sale, but to guarantee your rights to any profits or losses, you need to either form an entity in which you both own 50% (if you are splitting it down the middle) or you need to both be on title either in personal name (which I don't recommend if you have any personal assets to protect) or you both form your own entities with each entity holding 50% to the title.

 

@Will Barnard just for clarity:

Some lenders have placed "seasoning" requirements on the seller's ownership. If the seller has not owned the property for at least six months, the lender will assume that the deal is fishy and refuse to fund the buyer's loan. If the buyer is getting an FHA insured loan, there is no way around the "seasoning" issue. FHA regulations prohibit the funding of a purchase where the seller has not owned the property for at least 90 days and virtually NO EXCEPTIONS. So yes you can sell it but you must find a buyer who can get a loan that requires little seasoning.



 

You will most likely not get a traditional mortgage to flip houses. Flippers use cash, helocs, private lenders or hard money lenders to buy and rehab houses. They use their profits to build seed money that lets them scale.

@Guifre Mora @Will Barnard @Brent Paul thank you all for you guidance, honestly I did not know much about hard money loans at all, I just always though it was a loan from an individual with extremely high interest rates.

After looking into it it seems they mostly care about your down payment and have if the loan as  collateral, seems to me that credit is not a huge issue,

As my credit is not the best at the moment. What do you think? Also do you know any HM lenders that would possibly loan to be with as little as 10% down? I can do 20% but of course would rather do 10

@William Decker They loan based on the ARV. Some don't care much about credit and some do. Really varies by lender. It's in their best interest to get paid and they don't want to be sitting on a property they have to sell later on.

70% of ARV is what some will do. So if the ARV is 100k they will only lend up to 70k. They still might require a downpayment. Again that will vary by HM lender. If the gap between purchase + repairs to ARV is small you might have a tough time. You will want a buffer in case there are cost over runs and believe me you will have those. I'm not a flipper, but I personally wouldn't touch anything that only gave me 20k in profit.

The other thing to think about is a 2nd and 3rd exit strategy.  HM loans are high interest and you don't want to be paying on them for 6 months.  You need to think about what to do in case the house doesn't sell or some big repair comes along that pushes the timeline down another 2 months away.  I have seen too many people take a huge loss because they either way underestimated repairs or the house didn't sell so they had to lower it to get out of the HM loan for a huge loss.

Whether you are a flipper or buy and hold investor there is always that risk the market in your area shifts and house values go down.  It happens.  One of my properties went down 15k this year.

Originally posted by @Guifre Mora :

@Will Barnard just for clarity:

Some lenders have placed "seasoning" requirements on the seller's ownership. If the seller has not owned the property for at least six months, the lender will assume that the deal is fishy and refuse to fund the buyer's loan. If the buyer is getting an FHA insured loan, there is no way around the "seasoning" issue. FHA regulations prohibit the funding of a purchase where the seller has not owned the property for at least 90 days and virtually NO EXCEPTIONS. So yes you can sell it but you must find a buyer who can get a loan that requires little seasoning.
 

I'm fully aware of FHA seasoning requirements but that was not the topic of conversation and your entire response here, while accurate in those specific cases, have nothing to do with an investor purchase of a home looking to flip it from a conventional lender or any other lender.

The original poster asked about getting a conventional bank loan with the limited funds he had. So let’s try and stay on topic with that as to not confuse him or anyone else reading this.

Originally posted by @William Decker :

@Guifre Mora @Will Barnard @Brent Paul thank you all for you guidance, honestly I did not know much about hard money loans at all, I just always though it was a loan from an individual with extremely high interest rates.

After looking into it it seems they mostly care about your down payment and have if the loan as  collateral, seems to me that credit is not a huge issue,

As my credit is not the best at the moment. What do you think? Also do you know any HM lenders that would possibly loan to be with as little as 10% down? I can do 20% but of course would rather do 10

Correct, hard money lenders mostly care about your capital contribution, capital for payments and holding costs and the asset itself more than they do about credit but credit does come into play as far as their assessment of risk.

I have heard of a few HML's here in CA willing to do 90% funding plus rehab as well but I'm sure it is costly, I'm sure they want to see at least decent credit, and they absolutely would need to see a good enough deal with enough spread for protection of their loan funds.

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