What Are Fix-and-Flip Loans?

Flipping homes can be a lucrative real estate investing strategy if your renovations are on point and you have a solid understanding of the housing market. But whether you’re investing in your first flip or you’ve bought and sold several properties, securing the right financing for your project is essential. 

Several options are available for financing a flip. Here’s what to know about fix-and-flip loans, how they work, the types of financing you can choose from, and how to apply. 

What are fix-and-flip loans, and how do they work? 

Fix-and-flip loans or lines of credit are short-term financing options that help real estate investors purchase and renovate an investment property with the goal of reselling it fast. Ideal borrowers for fix-and-flip loans are real estate investors who plan to repair or improve a property and resell it within 18 months. 

Financing structures can vary by lender, and you may be able to get a lump-sum loan or a line of credit for an upcoming project. Some lenders may allow you to make interest-only payments until you sell the property. 

You may need to provide your lender with a business plan, renovation estimates, and a project timeline as part of the application process. You can use the following calculations to estimate how much financing you might qualify for and your potential profit on a flip: 

• Loan-to-value ratio (LTV): As its name suggests, this ratio is your total loan divided by your property’s market value. Many lenders allow an LTV of up to 90%.  
• Loan-to-cost ratio (LTC): This ratio is your total loan divided by your total repair costs. Lenders consider a lower LTC ratio more favorable, but 80% is common. 
• After-repair value (ARV): This is an estimate of the after-repair value of your home based on area comps, taking repair costs into account. Many lenders offering fix-and-flip loans will lend up to 75% of a property’s ARV.  

Our expert’s advice: Financial risks

Erin Kinkade

CFP®

In my experience, one of the main risks of fix-and-flip loans is not having the home renovated in time to sell within the terms of the loan. So prior to applying for the loan, I suggest having as many preparations and plans for the renovation ready, including connecting with contractors, electricians, and other professionals, to ensure they’re available when the financing comes in. (Or if you’re confident you’ill be approved based on your credit history and background, go ahead and try to get the project started if you can.) The other risk is not being able to sell the home by the time the term is up due to any number of reasons: a delay in the renovations, occupancy not granted, or the housing market, interest rate environment, or economic environment. To mitigate this risk I recommend staying is up-to-date on the current housing environment and the outlook for the specific area. Be sure you have trusted advisors (friends, mentors, or professionals) to consult with.

Types of fix-and-flip loans 

Several types of fix-and-flip loans may be available, each suited for a different type of borrower. Underwriting requirements for each financing option will vary depending on the lender you choose, and not all traditional lenders offer every option. 

Here’s a quick look at six types of fix-and-flip loans and who they’re best for. You can click the loan type in the table below to jump to more details.

Loan type	Best for
Business credit line	Seasoned investors seeking flexible financing
Home equity loan or home equity line of credit (HELOC)	Investors with significant equity in a primary residence
Personal loan	Investors seeking a small amount of financing
Hard money loan	Investors who can’t secure bank financing
401(k) loan	Investors with significant retirement savings who can’t secure bank financing or a hard money loan
Seller financing	Investors with sellers willing to offer financing

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Business credit line

How it works

Many banks and credit unions offer business lines of credit, which let you borrow up to an established amount as needed. These credit lines can be secured—backed by collateral—or unsecured. Because you borrow on an as-needed basis, this type of financing is a solid choice if you’re unsure how much a project will cost. To qualify for a business line of credit, you must prove that your business is established and financially sound. 

Who it’s best for

If you’re an experienced real estate investor with an established business, strong financials, and excellent credit, a business line of credit could provide flexible funding for current or future projects. 

Pros

• Flexible funding for current and future projects

• Interest only accrues on the amount you decide to borrow

Cons

• May need several years in business to qualify

• Excellent credit often required

Home equity loan or HELOC

How it works

With a home equity loan or HELOC, you borrow against equity you’ve accumulated in your primary residence. Home equity loans come in a lump sum, and HELOCs are lines of credit you can borrow against as needed. You’ll often need at least 15% equity in your home to qualify for either of these options, but you can use either to finance a flip. 

Who it’s best for

This option is best for investors with significant equity in their primary residence. Those with an established project budget might consider a home equity loan, but a HELOC could be a better choice for a borrower who needs more flexibility with their renovation budget. 

Pros

• Widely available

• Relatively low rates

• Interest only accrues on the amount you decide to borrow (with a HELOC)

Cons

• Equity is required

• Lender could foreclose on your primary home if you default

• Good or excellent credit often required

Personal loan

How it works

Personal loans can be up to six figures, depending on your lender’s limits, and you can use the funds to renovate a property. Most personal loans are unsecured, but secured loans are available. Secured personal loans tend to come with lower rates than their unsecured counterparts due to the collateral required. 

You’ll likely need fair to good credit to get approved for a personal loan, and you could get funds as soon as the day of approval. (Note that disbursement times vary by lender.)

Who it’s best for

If you have good credit, a smaller project budget, and need fast funds, a personal loan could be suitable. 

Pros

• Widely available

• Funds often disbursed quickly

• Range of loan amounts

Cons

• Good credit may be required

• May have higher rates than some other options

Hard money loan

How it works

Hard money loans are loans from online lending platforms, such as BridgeWell Capital or Capital Funding Financial. Their borrower requirements may be more flexible than traditional lenders, and potential loan amounts could be higher. But you may see higher interest rates with hard money loans, and terms are generally 12 to 24 months. 

Certain hard money lenders may allow you to make interest-only payments while you’re renovating your property, which could help you save a significant amount on holding costs. However, other lenders may require principal-and-interest payments, which could be high given the short loan terms. Ask about loan and payment structures before applying.

Who it’s best for

Newer investors with less-than-stellar credit could benefit from a hard money loan because they’re often easier to qualify for than more traditional financing options. 

Pros

• More flexible borrower requirements

• Large loans may be available

• Interest-only payments may be an option

Cons

• Relatively high interest rates

• Short loan terms

• Monthly payments could be high

401(k) loan

How it works

Some 401(k) plans let you take out a loan against your retirement savings. If this is an option, you may be able to borrow up to 50% of your total balance or a maximum of $50,000. You could then use these funds to finance your renovation project and pay for listing costs. 

A couple of drawbacks of borrowing from your 401(k) are that your money will no longer be earning potential returns, and your employer could require a waiting period for you to begin contributing again, which may mean missing out on an employer match. You may also need to repay your total loan immediately if you leave your job. This is not an ideal option because your retirement account is meant for your retirement, but it may be suitable for certain individuals.

If you’re comfortable with these risks, have accumulated significant savings, and are a relatively young real estate investor, this could make sense if other financing options aren’t available. As with most other loans, you’ll repay your 401(k) loan balance with interest, typically over a five-year term. We recommend consulting with a financial professional or your employer plan representative before making this decision.

Who it’s best for

A 401(k) loan isn’t a wise choice for someone close to retirement age, but it could be a decent option if your retirement savings have significant time to recover and a financial professional agrees it’s likely your best option. 

Pros

• Relatively easy to get approved

• Quick disbursement process

• No prepayment penalties

Cons

• The money you borrow won’t earn returns

• Could jeopardize your retirement savings

• You could miss out on employer-match contributions

• Could become a fully taxable event, including a possible 10% early withdrawal penalty

Seller financing

How it works

With seller financing, also called owner financing, the home seller you’re buying property from acts as the lender. This nontraditional financing option lets you make monthly installment payments to the seller instead of a traditional lender. 

Seller financing may provide mortgage opportunities for borrowers who can’t qualify for other types of loans or credit lines and could help you save on closing costs. But it’s a complex financial arrangement. If you’re considering this route for financing your fix-and-flip, it’s best to consult with a real estate attorney to draft a lending contract. 

Who it’s best for

Seller financing could be an accessible option if you can’t qualify for other types of financing. Investors with poor credit may appreciate the more flexible approval requirements seller financing provides. 

Pros

• Relatively easy to get approved

• Poor credit may be accepted

• Potentially lower closing costs

Cons

• Complex financing arrangement

• May require a large down payment

• Higher rates may apply

Fix-and-flip loans vs. traditional home loans

You could also use a traditional mortgage to finance a flip. A traditional mortgage is likely to get you a lower rate, which could save you on interest if your project timeline is long. 

That said, underwriting requirements may be stricter, and you could end up making a sizable down payment. Lenders often require a down payment of at least 3.5% for traditional home loans. The condition of your investment property may also play a role in whether you qualify for a mortgage. Many lenders won’t finance homes in poor shape.  

	Fix-and-flip loan	Home loan
Term length	Short ⌛	Up to 30 years ⏳
Average rates	Depends on type of financing  Generally higher than home loans ⬆️	5.96%* (15-year term) ⬇️ 6.69%* (30-year term)
Purpose	Finance renovations	Purchase a property
Collateral required?	✅ (sometimes)	✅
Down payment required?	❌	✅ 3.5% – 20%

*Rates in February 2024

Our expert’s advice

Erin Kinkade

CFP®

I suggest using an online house flipping calculator to enter preliminary estimate costs. It’s critical that you understand all the costs involved and are able to obtain accurate comps for the expenses and estimated selling price. I think some think flipping a home sounds like an easy process, but when you get down to the logistics and details, it’s a big commitment with time and funds. I suggest entering this space slowly if you’re new to it.

How to get a fix-and-flip loan 

Banks, credit unions, and online lenders may offer financing for your project. But if you’re considering a fix-and-flip loan, it makes sense to determine which financing option is best because the application process and borrower requirements vary. 

Personal loans, for example, tend to have a simpler application process than home equity loans, but you’ll likely need fair to good credit to qualify for either. 

Once you’ve decided on a type of financing, compare rates, terms, and borrower requirements to find the best lender for your situation. Be prepared to provide the following:

• Personal information, such as your name, email, phone number, and address
• Copy of government-issued photo ID
• Proof of income, such as W-2s or past tax returns
• Bank statements
• Information on current debts
• Plans for your flip, such as renovations and estimated costs