What Is a Fix and Flip Loan and How Does It Work?

A fix and flip loan is a specialized financial tool for real estate investors. Its primary purpose is to fund the acquisition and renovation of properties, with the intent of quickly reselling them for profit. This financing supports short-term property rehabilitation projects, enabling investors to capitalize on undervalued assets through rapid turnover and value creation.

Understanding Fix and Flip Loans

Fix and flip loans provide short-term financing for purchasing, renovating, and reselling properties for profit. These loans differ from traditional mortgages, which are long-term loans for owner-occupied homes. Unlike conventional loans, fix and flip financing prioritizes the property’s potential rather than solely the borrower’s credit history.

These loans are characterized by faster approval times, often closing in 7 to 14 days, compared to 30 to 60 days for traditional mortgages. Repayment terms are significantly shorter, typically ranging from 6 to 24 months, though some can extend up to 36 months for larger projects. This short duration aligns with quickly renovating and reselling the property.

Lenders offering fix and flip loans include private and hard money lenders. These non-traditional lenders are more flexible with eligibility and provide quick access to capital, suitable for time-sensitive real estate opportunities. Traditional banks, with stricter underwriting and longer approval processes, typically make them less aligned with the fast-paced nature of flipping.

Financial Structure and Key Terms

The financial structure of a fix and flip loan is tailored to its short-term, investment-focused nature. These loans are typically secured by the property being purchased and renovated.

A key metric is the Loan-to-Value (LTV) ratio, comparing the loan amount to the property’s value. For fix and flip loans, lenders often consider the After-Repair Value (ARV), the estimated value of the property after all planned renovations are completed. Lenders may offer a loan amount based on a percentage of the ARV, commonly up to 70-85% for total project costs, or 90% of the purchase price and 100% of renovation costs.

Interest rates on fix and flip loans are higher than traditional mortgages, often ranging from 8% to 15% annually, reflecting shorter terms and increased risk. In addition to interest, lenders may charge “points,” which are upfront fees paid at closing. One point equals 1% of the loan amount; origination fees typically range from 1 to 3 points.

Funds for renovations are not disbursed as a lump sum but rather through a draw schedule. Funds are released in stages as construction milestones are met. Lenders typically conduct inspections to verify work completion before releasing subsequent draws, ensuring funds are used as intended. Loan terms are short, commonly 6 to 18 months, with some extended terms available, and often feature interest-only payments during renovation.

Borrower and Property Qualifications

Lenders evaluate both the borrower and the property to determine eligibility for a fix and flip loan. While less stringent than traditional mortgages, criteria help ensure project success and loan repayment.

Lenders typically look for real estate investment experience, though hard money lenders consider first-time flippers, sometimes with a higher down payment or additional compensating factors. Creditworthiness is a factor, with many lenders preferring a minimum credit score of 620-660; a higher credit score can lead to more favorable loan terms.

Borrowers must demonstrate sufficient liquidity or cash reserves to cover down payments, closing costs, and potential unexpected expenses during renovation or holding period. A clear and well-defined business plan for the project is also often required, outlining the strategy for renovation and resale.

For property qualifications, lenders seek distressed properties that offer significant potential for value addition through renovation. These properties are often purchased below market value due to their condition. Properties in desirable or growing markets are preferred, as they offer better resale potential. Lenders assess whether the property’s After-Repair Value (ARV) can be accurately estimated, ensuring a profitable outcome. Properties with severe structural issues or complex title problems that could hinder a quick sale are typically avoided.

Securing and Managing the Loan

Securing a fix and flip loan involves a structured process. Before applying, borrowers should gather essential information and documentation to present a comprehensive project overview. This includes a detailed project scope and budget, outlining renovation plans, cost estimates, and a realistic timeline. Property details, such as the purchase price and estimated After-Repair Value (ARV), are also critical components.

Borrower financial information is necessary, including personal financial statements, bank statements showing proof of funds for down payment and reserves, and tax returns. If applicable, proof of prior real estate investment experience, such as past successful projects, can strengthen an application. Having appraisal and inspection reports for the property can further support the loan request.

After compiling information, the application and approval process commences. The complete application is submitted to the lender for review. The lender conducts due diligence, underwriting the loan, verifying provided information, and often ordering an independent appraisal of the property’s current and projected value. Once approved, the borrower receives a loan offer, and upon acceptance, moves to closing, where loan documents are signed and initial funds are disbursed.

Managing funds and repayment post-closing is important. Renovation funds are typically released through a draw schedule, where the borrower requests funds as construction milestones are met. Each draw request is usually subject to inspection by the lender or a third party to verify work completion. Maintaining the project on budget and schedule is crucial, as cost overruns or delays can impact profitability and the ability to repay the loan. Repayment generally occurs as a balloon payment at the end of the short loan term, typically from the proceeds of the property’s sale.