House flipping is a potentially lucrative business. However, the losses can also be huge if you don’t know what you’re doing. Although you don’t need years of education to get started, you must be knowledgeable in property investment, the real estate market, construction, and interior design to succeed in the business.
Apart from the technical know-how, you also need a sizable fund before you can flip even just one house. You can get a loan to finance your first project, but traditional mortgage programs are rarely the best choice for flipping houses.
Traditional lenders, like banks, prefer to finance properties that are move-in ready. This goes against the concept of house flipping, which takes fixer-uppers, renovates them, then resells for a profit.
So, what are the best home mortgage options for your flipping business?
1. Private Loan
Private loans are your best bet for financing a flip because they don’t require good credit scores. Another major benefit of private loans is flexibility, allowing you to negotiate for loan terms that work in your favor.
Private lenders are usually family members, friends, and other private investors who are willing to lend you money. You can either pay the investor an interest rate or promise them a percentage of your profits. Make sure to write down a contract so both parties know what they’re signing up for.
This loan option is the most attractive for house flippers. However, it’s difficult to look for people willing to lend money for house flipping, especially if you’re new to the business.
2. Hard Money Loan
Hard money loans are designed for borrowers with low credit scores. This loan is also ideal for people planning to repay the money within a short period, usually a year or two.
Hard money lenders are organized lenders willing to take on a large investment risk, such as fixer-upper properties. This means it’ll be easier for you to find a hard money lender for your flipping business compared to a private lender.
However, the interest rates of hard money loans are much higher, averaging at 11.25 percent this 2020. The high rates are due to the huge investment risk and short loan term.
3. Home Equity Line of Credit
Another option is to take out equity from your personal residence. The advantage of this loan is you can withdraw small amounts of money as needed. This ensures that you don’t accidentally use up all your equity. Plus, you only need to pay interest for the amount you spend.
Note that you need at least 20 percent equity on your house to qualify for a home equity loan. But it’s better to have more than 20 percent if you’re planning to borrow a sizable amount. Also, home equity loans require good credit scores.
Make sure your monthly income is enough to afford your original mortgage payments and the additional payment for your home equity loan.
These three loan options have their own pros and cons. Compare each mortgage program and evaluate your own financial capabilities to figure out which one best suits your needs and goals.