Nearly everybody I talk to says that “money” is the number one issue that prevents them from getting started flipping houses.
I get this question all the time.
Thousands of people have asked me this in fact through meetups, REIA meetings, on the BP forum here as well as well as my own personal email list and blog.
Personally, I don’t like traditional financing is the right way to fund flips. I’d much rather flip houses with other people’s money like private lenders.
However, if you’re bankable and you feel traditional banking is the way to go, then this way of getting a loan for your flip should no be discounted.
One of my partners at House Flipping School funded ALL of his flips through traditional bank loans…so trust me, it can be done.
The 20 Best Books for Aspiring Real Estate Investors!
Here at BiggerPockets, we believe that self-education is one of the most critical parts of long-term success, in business and in life, of course. This list, compiled by the real estate experts at BiggerPockets, contains 20 of the best books to help you jumpstart your real estate career.
The Truth About Banks and House Flips
Of course there are house flipping pros who believe that with the economy still recovering, banks have tightened their restrictions on loans for investors so much that it’s nearly impossible to get a loan nowadays.
Although private money is how I fund all my flips, if you are a beginner, I recommend that you try the traditional bank loan route first.
Banks ARE in the business of lending money…so keep an open mind!
Different Kinds of Loans a Bank Offers
Take note that conventional mortgages and traditional loans are very different from government backed mortgages. Most banks sell both kinds but they are very different for an investor and potential buy and hold or short-term house flipper.
Traditional bank loans, other than the fact that they are not backed by the government, the entire risk factor for the loan remains with you. Taking out a FHA or VA loan is very different from taking out a traditional mortgage on real estate. Check with your bank on which applies to your situation.
If you are a first time home buyer and purchase a two-family home, live in one side and rent the other, this is a great way many new investors use to get into their first real estate investment. I know many people who launched their house flip careers doing just that.
Credit unions and banks will issue you a traditional loan under the assumption that if you default, you will carry the risk. As a result, you’ll need to meet stricter lending requirements and potentially make higher down payments as a result – so this could be cost prohibitive for you if you are short on cash.
If a large down payment is needed however, you can always get the smaller portion of the cash needed from a hard money lender or private money lender and then use that cash to fund the down payment. Of course you’ll need that cash in hand when you go to the bank.
Suffice to say, there are many options to consider and many combinations of how the money will flow for your flip or investment property, so the idea is to be creative and keep an open mind.
4 Steps To Get A Loan To Flip Houses
If you go back in history, traditional mortgages were the first mortgages to ever be issued.
However, mortgage financing is a concept that was developed recently to cater to people who have special demographic requirements and income levels.
Here are four steps could help you get a traditional bank loan for your house flips.
1. Check Your Credit Score
Banks love people with good credit scores, which is why it is important that you check what yours is. Credit scores are like your driving record. They don’t just take into account your present actions; they also take into account your behavior in the past years.
A credit score is composed of the following:
Payment history (35% contribution on the FICO scale) – how timely you’ve paid bills in the past
Debt (30% contribution on the FICO score)
- Revolving debt – This is credit card debt, retail card debt or gas card debt.
- Installment debt – This is a type of debt where there is a fixed payment for a fixed period of time like an auto loan.
- Open debt – This is the kind of debt that must be paid in full each month.
Credit File Age (15% contribution on the FICO scale) – The older the credit report, the more favorable.
Account Diversity (10% contribution on the FICO scale) – The more diverse your debt, the better here.
If you’re looking to get approved for a mortgage to fund a flip, a credit score of 620 or higher should suffice – but your interest rate may not be as favorable if you were in the 700s.
Try as much as possible to raise your credit score a few months before you apply for a mortgage loan by affecting any number of the segments listed above.
Also there are several ways that you can increase your credit score – such as checking for errors in your credit report, reducing the amount of debt you owe and setting up payment reminders among others.
2. Organize Your Documents
When you apply for a loan, ensure that all your documents are in order before approaching the bank for a loan. Get your assets and income verified and prepare to pay private mortgage insurance or make a down payment of at least 20% of the value of the house.
Lenders require private mortgage insurance mostly due to the risk of default. Other documents that you will need to provide the bank with include your account and bank statements, your employment history, recent tax stubs and W-2 tax forms.
3. Don’t Just Rely On One Bank
Once you have familiarized yourself with mortgage requirements, you should start contacting several lenders. Don’t just zero in on one because that happens to be your personal bank. Look elsewhere.
This is where networking and meeting bankers at events is so vitally important to your real estate investing career.
This is because different lenders may have different terms. As a matter of fact, you might find that the bank where you do your daily transactions doesn’t have the most favorable terms.
You shouldn’t also strike credit unions off your list just yet; there are some credit unions which offer great rates to their members.
Have an open mind and contact as many as you can so you can stay organized.
4. You Might Need To Provide Extra Documents
Documentation is especially critical for people who are self-employed. Self-employed people are notorious for declaring lower levels of income to avoid paying taxes…but when applying for a bank loan, this will come back to bite you.
The huge number of mortgage defaults since 2008 has led to many lenders scrutinizing mortgage requests. Your lender might ask you to present copies of your taxes for the past two years.
Lenders go through the whole scrutinizing process to ensure that borrowers have sufficient cash reserves after they’ve bought the home.
Document as much of your income as possible and do your best (tough indeed) to declare realistic levels of income on your taxes where appropriate.
Getting a traditional loan mortgage shouldn’t be difficult as long as you do everything correctly and at the right time. The steps above are simple ones to follow when taking out a traditional mortgage.
Remember that banks are in the business of lending money…despite what you may think!
Having everything organized ensures that you accelerate the process and consequently avoids lots of time wastage and back and forth with the banks.
Also don’t forget that a simple mortgage calculator is also important because it will help you get an approximate estimate before starting anything.
Do you have any other ideas that you use to get a traditional loan to flip houses? Share your ideas by leaving a comment below.