The Basics of a Fix/Flip Loan Process for New Investors, (Guide)

There’s a lot of questions in peoples minds about how to get a loan to do a Fix/Flip project. Do I have to be an experienced investor? Do I need tons of money? Or, perfect credit? My aim with this article is to try to clear up some of these questions as well as encourage new investors looking to enter the Fix/Flip investment space.

We all watch HGTV shows and wonder if we could do that great project with shiplap walls and marble countertops. But, once the show is over, we really don’t think we would ever be able to try it. I’m here to tell you that it isn’t true. There are new investors that enter the Fix/Flip investor business all the time. You can be one, too.

First, let’s explain the loan itself. It is a 12-month, interest only, fixed rate* loan with no prepayment penalty. This loan is broken down into two parts, the purchase loan and the rehab loan. Most loans can offer up to 80% of the purchase price and 100% of the rehab costs, not to exceed 70% of ARV** combined. But there are some rules. The property cannot be your own personal residence or become your personal residence. The property must be purchased under a business name, such as an LLC. Rural properties are often denied, due to the lack of comparable properties for determining the ARV. So, be sure to check out the area before making offers. Here is some good news, though, no tax returns or income verification required to qualify. Fix/Flip loans are a type of asset based loans, that is, the quality of the property and the potential value you can create in it helps secure the funding.

Next, let’s look at qualifying for the loan and what information you need to get a Term Sheet, sometimes referred to as a quote. Look at the list below.

Items needed to create a Term Sheet

-Your name
-Your business name (LLC)
-Property address
-Property Type (single-family, townhouse, condo, etc.)
-FICO Score (estimate)
-Purchase Price of Property
-Rehab cost

^You will be asked about your nationality.
^You will be asked whether the deal is with a wholesaler*** 
^You will be asked how much experience you have in investing.  
^A rural check on the property will be done, too.

The Term Sheet will explain the details of the loan including interest rate, down payment, liquidity requirements, monthly payment, etc.

Let’s explain what liquidity requirements are. On the Term Sheet, it will show a value that you will need to have on hand to qualify. This is liquidity and it consists of the down payment and 3-12 months of debt coverage for the loan. Below are numbers from a sample Term Sheet for comparison.

Sample Term Sheet Numbers

-Purchase Price $125,000
-Rehab Costs $45,000
-Total  $170,000

-Total Loan $148,125 (82.5%)
-ARV $225,000
-Loan % to ARV  65.8%
-Interest Rate 11.74%
-Monthly payment $1105-$1443 (it rises when draws are taken)
-Down Payment and closing costs $27,900
-Total liquidity required including downpayment $38,665

^Based on a borrower with 725 FICO and experience of one flip in the last 2 years.

Now that you’ve seen your Term Sheet and, let’s say, you agree to the terms and want to proceed. Expect to take a minimum of 10 days after you have sent in the required documents from the list below. At the time of this writing, it may take up to 5 weeks to complete due to the heavy load of appraisers. Nevertheless, keep it in mind when making offers on properties.

Required documents to submit.

-Photo ID
-Last 2 months of bank statements, all pages.
-LLC Documents, Articles of Org., Operating Agreement, and EIN letter.
-Purchase Contract for property.
-Rehab Budget (get template from lender).
-Credit Application for all LLC partners (get from lender).
-Experience list, if any (get template from lender).
-Contact information fom your attorney or tile agent for closing.

Hopefully, this helps clear up some questions you may have with the loan process. In later articles, I will cover the loan period, refinancing, etc. In the meantime, its a great time to start your Fix/Flip career and invest in your future.

*Rate is determined by borrowers experience, FICO, etc.

**ARV refers to After Repair Value, the value of the property once the rehab is complete and ready for sale or rent. A comparable opinion or appraisal will determine this.

***A wholesaler is an investor that will sell purchase agreements on properties to investors.

Please feel free to contact me with the details of your Flip and get a quick Term Sheet.

Kevin Dalrymple

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