You're about to flip a property. You have two options: a fix-and-flip loan or a conventional loan. Most people are familiar with conventional mortgage loans, but a fix-and-flip loan is often better. Here's what you need to know.
Fix-and-Flip Loans Are More Flexible
Under a fix-and-flip loan, the investor is aware that you're purchasing a property that you might not be able to afford long-term. They know that you're going to be selling the property shortly, and consequently you can afford to pay more now per month than you could over the next thirty years. Thus, they're usually able to give you more flexible terms.
Conventional Loans Have Lower Rates
Conventional mortgage loans generally have better terms and lower rates, but there's a reason for that: They're also more difficult to get. A conventional mortgage loan will usually require that you have very good credit and that you have the income to match your mortgage payment. And an investor's loan requires a larger down payment than a loan for a house that you'll live in.
Fix-and-Flip Loans Can Be Used for Damaged Properties
Want to buy and fix a foreclosure? You might have difficulties with a conventional loan. Conventional loans want homes that are generally in good condition because the bank is going to have to sell the property if the property is foreclosed on. Comparatively, fix-and-flip loans often understand that you're purchasing a damaged property and simply want to make sure that the property can gain value in the future.
Conventional Loans Are Over Longer Terms
The payments on a conventional loan are much lower than a fix-and-flip loan because you're expected to pay over thirty years. But this is a bit of a double-edged sword. The conventional loan may also come with a significant down payment and a loan origination fee because it's expecting that you're going to be investing in this property over decades of time.
When it comes down to it, most people are going to choose fix-and-flip loans when flipping homes because conventional loans will turn them down. Conventional loans often aren't open to fix-and-flip properties — they require more of an upfront investment, need a home that is in livable condition, and require that the borrowers have near-perfect credit and income.
But if you have the ability to get either a fix-and-flip loan or a conventional loan, consider comparing the rates of each and making a decision based on those rates.
To learn more about fix-and-flip loans, contact a lender.