Finding a loan that’s right for you can be difficult, add the fact you want to flip a house with the loan and things might seem overwhelming. Don’t worry, though because we got your house flipping back! Understanding terminology that sounds complicated but isn’t will support you in making decisions that are right for you.
What Are The Costs of Flipping Homes
Flipping a house might sound like a profitable business, but like any successful business, it’s work. It takes much more money to flip a house than it does to buy a home in which you want to live.
Short-term capital gains tax rates of 10% to 37%, depending on your federal income tax bracket. This will cut into any earnings you make on investments you flip within one year.
Unfortunately, this isn’t 2005 when anyone could get a mortgage with nothing down. Even if you qualify for a loan with a down payment, you’ll pay more because lenders see flipping as a riskier proposition.
Also, many lenders are reluctant to work with amateur flippers. Lenders will want to see that you have a strong track record of selling at homes for a profit. Even if you have just one that’s a great start. If you do find a lender who doesn’t care so much about a strong track record, then they’re likely to charge you higher fees on a loan.
Hard money lenders aren’t usually bothered by borrower requirements such as debt-to-income ratios and credit scores. 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 from other sources.
Where to Barrow?
Friends & Family
Many people invest in real estate to get above-market returns and might be interested in your project. And since family and friends have a personal connection with you, they’re likely to charge the lowest interest rates.
House flippers can find themselves in an uncomfortable position: They have the market experience to know what it takes to capitalize an excellent flipping opportunity but lack the money to finish. This is where bringing on a partner can help. Partners can:
- Find the flipping opportunity
- Plan and manage the renovation
- Supply/support in the financing
Home Equity Loan or Line of Credit
This works the best for flippers who are homeowners and have at least 20% equity in their primary residence.
To qualify for a home equity loan or line of credit, you should have at least 20% equity in your home, ideally more depending on how much you want to borrow. You should also have sufficient credit and enough monthly income to afford your mortgage payments and pay off the HEL (Home equity loan) or HELOC( Home equity line of credit).
Yet another option on how to finance and do flip is to take a loan or withdraw funds from your 401(k) account. 401 (k) Financing isn’t an excellent choice for someone nearing retirement age. If you’re a young house flipper then taking a loan from your 401(k) might be worth it if the rewards outweigh the risks.
To qualify for a personal loan, you’ll need a credit score above 650. Rates on private loans can be as low as 5%, and you pay the loan back in monthly installments over a three- to a seven-year term. The catch is that the loan amounts are relatively small, capped at $50,000. So, you may have to combine a personal loan with other loan options to finance your fix and flip.