We’ve been made to believe that flipping a house is simple, if not downright easy. An endless barrage of house flipping tv shows present the process in neat little timeslots filled with montages of drilling and demoing, and finish with a satisfying “SOLD” sign. If you’re here then you’re probably well aware that in reality, however it’s not quite that simple.
If you are interested in the idea of flipping houses, want to learn how to flip your fist house, get an idea of the average cost and profit on a house flip, and want to see if house flipping could be right for you, we’ve put together a short summary of the main points you need to know and consider.
Just like any house purchase, purchasing a house with the intention of flipping it will likely require some financial backing. Traditional home loans are not usually an option, as they come with a multi-year mortgage and other terms that assume you are purchasing the home to live in for at least several years. If you’re buying a house to flip, your two main financing options are hard money loans or HomeStyle loans.
Hard money loans are commonly provided by private individuals, with the property they are used to finance acting as collateral. Hard money loans are often a faster route than traditional loans from banks and credit unions, and do not require a credit check. These loans are issued for the short-term (no longer than 5 years), and their interest rate is accordingly much higher than traditional loans. Their chief advantage is that they offer quick, easy money when you need cashflow to get your house flip moving.
Your second option is a HomeStyle loan, a Fannie Mae-backed loan intended for home buyers or homeowners to finance upgrades to their properties. HomeStyle loans offer lower interest rates than home equity lines of credit and similar private loans, sometimes as low as 3%. You can borrow up to 75% of the home’s projected ARV with a HomeStyle loan, which will can cover the purchase cost of the home almost entirely in many cases. These loans do have some drawbacks, however, as they come with a long list of terms that dictate what and how you can repair the home. For instance, HomeStyle loans impose a limit of 10% on any DIY work and don’t allow for structural changes to the home. They also impose a timeframe in which you must finish the renovation, and require a minimum credit score of 620 to apply. HomeStyle loans are a great option if you have the credit and are planning to do a moderate flip, but are less ideal for those who wish to have more creative and hands-on control on the flip.