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A Hard Money Fix and Flip Loan is a loan used by real estate investors who purchase and rehab single family, multi-family, or commercial properties, with the intention of either selling or holding them for future cash flow. The loan is commonly underwritten to the future value, also known as After Repair Value (ARV), includes funds for both purchase and renovation costs, and have a loan term of 6 to 18 months.
Unlike conventional loans, Fix and Flip Hard Money Lenders are less concerned about the Borrowers credit and income and more concerned about the condition of the property, the purchase price and after repair value, and the Borrowers experience.
The primary reason a real estate investor may use a Hard Money Fix and Flip Loan is because they close much quicker then a conventional bank mortgage, they include renovation funds, and they are primarily based upon the property being purchase versus the Borrower credit. Further, hard money lenders typically do not have a cap on the number of loans a Borrower may have.
Unlike conventional mortgages, hard money Fix and Flip loans are specifically structured to allow real estate investors to quickly purchase, renovate, and sell or refinance properties. Further, unlike bank loans, hard money Fix and Flip loans are underwritten to future value and normally include a renovation reserve. The renovation funds are disbursed to the Borrower over the course of the project. Once the renovations are complete, the loans are either paid off through the sale of the property or a refinance of the loan.
Real Estate Investors will use a Hard Money Lender for a Fix and Flip Loan because of speed and the ability to borrow renovation funds. It should be noted however, the upfront fees and monthly payments will be higher than a conventional mortgage because of the risk associated with these types of loans. Additionally, the loan has a short maturity of 6 to 18 months.
Getting approved for a Fix and Flip loan can be easy if you understand the underwriting process and are prepared to provide the appropriate underwriting material to the Hard Money Lender quickly.
The first step in the process is to identify Hard Money Lenders that specialize in funding Fix and Flip loans in your area. Once you have connected with a Fix and Flip Hard Money Lender, they will want to know if you have a property under contract to purchase. If you do not have a property under contract to purchase, they may complete a light underwrite and pre-approve you for a Fix and Flip Loan (Learn about the TaliMar Financial Preferred Borrower Loan program).
If you have a property under contract, they will request the following items:
Additionally, they may request two years of tax returns, bank statement evidencing you have the cash equity requirement for the project, and a list of your contactors and sub-contractors.
The second step in the process may include ordering a 3rd party appraisal and property inspection. Most local Hard Money Lenders will waive these requirements as they may simply meet you at the property and do their own internal valuation.
The third step once you have submitted all the diligence material, the Hard Money Lender has completed their site inspection, and you have received approval is to sign the loan documents and close on the purchase.
There are a number of items to consider when applying for a Fix and Flip loan. The first is to ensure the hard money Fix and Flip Lender that you intend to engage has a track record of successfully funding hard money Fix and Flip loans in your market. Many Hard Money Lenders that advertise nationally are simply brokers and will sell your lead to another Lender, increasing the overall cost of your loan.
Another consideration is the amount of leverage that you will need for the project. Many Hard Money Lenders will promote low rates, but their loans may only fund 50% to 70% of the purchase price or they consider personal income and credit in their underwriting. Other Fix and Flip Hard Money Lenders promote high leverage loans, such 100% purchase and 100% renovation loans, but fail to disclosure they cap their loan at 70% of the After Repair Value, which would be significantly less than the 100 / 100 structure, or the cost of the loan doesn’t leave any profit for the Borrower.
The loan term is really important to consider as well. Many Hard Money Lenders will offer a “teaser” rate for 3 months, but after 3 months you may end up paying monthly points or a higher rate. Had you closed on a hard money Fix and Flip loan that had a term of 12 months but had a higher cost upfront, its may have been a cheaper option in the loan run.
A Hard Money Fix and Flip loan is great option for real estate investors are seeking a quick and flexible option to purchase and renovate a single family or multi-family property. Because the Lender is less concerned about the Borrowers credit and cash flow and more concerned about the real estate and the Borrower’s ability to add value, their underwriting process is much more lenient.
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