Fix and Flip Mortgage Basics
For years it has been shouted out from some pretty fancy purveyors that real estate investing was the key to earning millions. Back in the ’80s, prior to HGTV, it was Carlton Sheets. Carlton ran infomercials showing himself on yachts, in front of his Rolls Royce, or just interviewing people who had purchased his CD’s on how to make it in real estate. The funny thing is that he sold his cd set for as low as $49.99. Things have changed, now I see seminars coming to a town near you, and they are charging some big numbers to be part of their workshop. They charge thousands of dollars, which many spend to attend then have nothing left to work with.
I am not going to get into whether these programs are good or bad, I will say they are hyped, and anyone who is promoting themselves making millions in real estate and is selling courses there is a deeper reason behind that. The Real Estate Investors I know who have made substantial money are not do0ing training classes, they are looking for their next deal. I know if the wrong people read this I will probably get razzed for this, but save your money. We will have a section on real estate investing coming soon, or if you really want to know more just contact me through the contact page.
All this hype has created a real movement and was the reason for many markets coming back after the 2008 housing meltdown. The hardest part is finding the right properties, It’s all about the benjamins when flipping homes. Profit margin also plays into obtaining finance, it will be the basis of the amount that can be funded on a particular property. We are going to dive into the guidelines of a fix and flip loan so that you can understand the financing part. Besides, handling the finance for the investor is more fun and you can make more money doing it.
The Fix and Flip Mortgage Program is also considered a hard money loan. It is short term, usually, up to 13 months which provides the investor to complete the work and either sell the property or refinance into a longer-term loan program so that they can rent the property out. Hard money sounds frightening to many novices, it really means you pay a higher interest rate for supplying less qualifying loan documents. Rates and downpayment range based on experience and property. Under everyday normal situations (not that anything is normal nowadays), down payment will be between 10-20% down, and the rate will run from 8-13%.
I also want to be clear on the paying of points. It is common in the commercial finance arena. The points charged vary and can range from 2 – 5 points on a standard deal. This covers the lender and broker points which is common and customary in the industry. There are situations, depending on the borrower, who may have really challenging credit situations, or the property may be something out of the ordinary that points may be really high due to risk (10+Pts), and even the rate may reach upwards of 15%, these are challenging situations and these are specialized programs based on the exceptional risk factors. They are still underwritten to ensure that the borrower realizes a profit at the end of the project.
Investors understand that financing is simply a cost of doing business. If you are new to the industry you will be surprised to learn that many investors are willing to pay higher rates and points in order to supply less documentation and close faster than apply for low-interest loans that may tie them up for months. These same investors are buying and refinancing properties on a regular basis. Refinancing and pulling out the available equity allows them to invest in more properties. This is a consistent flow of business for you as long as you keep closing their deals. Relationship building is great, but investors want to be able to complete the transaction in a timely manner. No matter if you are the investor’s Mother if you can’t close the deal, or you fumble your way through the transaction that investor will find a new mother to deal with. This is why knowing your product, structuring the deal properly in order to submit with all the i’s dotted is important. There are a lot of bad actors out there, you want to be an educated professional.
Although guidelines may differ from lender to lender we will provide you with an overall view.
The program is available for first-time flippers as well as experienced pros.
- Borrowers can choose fixed and/or interest-only payments
- 10% -20 down payment (80-90% LTV)
- Can fund up to 100% of renovation costs ( But no more than 65% of the ARV* value)
- A minimum credit score of the borrower is 525 FICO
- Properties that can qualify are one to four units, condominiums, townhouses, and multi-family apartment buildings up to 20 units
- Stated Income
- Proof of funds **
- Credit file*
- The loan can be under a Limited Liability Corporation (LLC) and/or individual borrower
*ARV – After Repair Value
**Proof of Funds – you must have the funds for the down payment, closing costs, and the money needed for the first round of renovations. Especially if this is your first flip or if you don’t have enough experience. I also want to make a not here, that if you flipped a hundred houses 10 years ago or if you are the contractor that has worked for a flipper handling the renovations on 50 properties, this is no considered experience because you either haven’t done it in a long time or you have not controlled the financial part of the project.
Also, the renovation funds are released in draws, Once you have completed a certain amount of work an inspector will come out to review, Upon satisfaction the draw amount will be released. This process has become very streamlined and can be completed in a few days.
*** credit profile – The advent and growth of computers and the apps that are available lenders have become very analytical. Unlike true Hard Money where the LTV’s are lower and the loan is weighed mostly on the asset, the Fix and Flip Program provides greater risks to the lender. This risk has been causing credit score requirements to creep up, especially for novices or those who do only a couple flips a year. Many lenders will usually go back 2 years on derogatory credit, meaning if you had a foreclosure, bankruptcy, or any judgments, you may still have a great chance of getting the fix and flip financing you desire, I recommend that if you are credit challenged, contact Ebizmore so we can discuss and get you enrolled in the proper credit restoration program that will fit your needs, this will save you thousands of dollars in present and future financing charges. One other note is that a background check will be done, any white-collar crime is an immediate denial. Also, remember I talked about analytics, some lenders have taken this too far. Some lenders are saying that according to analytics, anyone that has a previous arrest has a high probability of default so they will not fund anyone with an arrest record. I find that ridiculous, but they can run their company the way they want.
Here are the key questions mortgage underwriters will be analyzing and reviewing in determining whether or not borrowers qualify for a fix and flip mortgage loans:
- Investors experience on how many fix and flip they have done in the past 24 to 36 months (the more the better)
- Amount of real estate investment experience borrowers have (having some rentals is good and how many consecutive years they have been investing)
- Borrowers credit profile, credit score, and payment history (we discussed above)
- Borrowers assets and net worth and liquidity they have ( Money available for the transaction and liquid assets is an important factor)
- Investor’s property portfolio and how many rental units they have under management (as above)
When structuring the file, always include a cover sheet that not only gives the underwriter the scenario of the project with timelines, a summary of borrowers’ experience, borrower’s funds available, and an explanation of supplementary items attached. Those supplementary items should include from the borrower an explanation for any credit issues, resume(letter of experience), and photos of the property from all outside and inside views.
Other Items Needed
Payoff Statement (if Refinance)
Rent Roll & Leases (if applicable)
Renovation Budget ( go to Applications and forms to Download)
Loan Application ( go to Applications and forms to Download)
Track Record ( go to Applications and forms to Download)
Last 3 Month’s Bank Statement
Drivers License and/or Passport
Articles of Incorporation
Operating Agreement (LLC) or Bylaws (Corp.)
Depending on the deal the lender will order an Appraisal or a BPO (Broker Price Opinion) where they will provide an as is value as well as an after repair value. The appraiser goes off the renovation budget to determine the value of the upgrades and how that will increase the value.
The renovation budget should be supplied by a licensed contractor.
This article was to give you a general perspective of fix and flip financing. It is important to understand that nothing is written in stone and as competition grows, economies ebb and flow and analytics play more into the financing industry guidelines can change. Lending is solely based on risk, it is the major factor in approvals and denials, rates and terms, and every factor regarding the lending platforms and the fund managers who provide the money on behalf of their clients. Some lenders are very risk attentive and have stricter guidelines and lower rates, while others are willing to roll the dice but require higher rates. And somewhere between those two types of lenders falls the borrower seeking financing.
When working with borrowers you have a fiduciary responsibility to that borrower and providing them the best service and information available. You should consistently work with them to move them towards the best financing products and rates, while helping them grow their business. The adage is that the factors that determine your credit score are called The Three C’s of Credit – Character, Capital and Capacity. The fact is that the three c’s play a more important role, it creates success and makes financing easier. In order to gain success in business or as an investor it takes all aspects of those 3 c’s to get where you want. So it is important that you get your client to that pinnacle and keep them there. It means more business for you, but it also means that you must work towards obtaining the 3c’s. Start with character, the character starts with an internal code of ethics in providing the best possible service you can focus on the goodwill of the client. Next is capacity, this comes with obtaining as much knowledge as you can absorb. You want to know more than your competition and be able to talk with confidence. This doesn’t mean you have to be an expert in all areas, you can concentrate on one specialty, and still refer other opportunities to an affiliate. With Character and capacity, the capital will come.
At Ebizmore we make it easy for you to get started in your own Finance business. By providing education articles, submission instructions, and even a professional underwriter to work with you and help you structure the deals. At Ebizmore we have hundreds of lenders to compete on your deal, assuring that your client gets the best possible deal available. Use the form to the right to contact us with any questions.
Authored By: ebizmore.com
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