Loans for flipping houses: A complete guide

You’ve probably heard of house flipping, when people buy homes that need a little love, renovate them, then resell them for a profit. It can be appealing, especially if you have a creative streak when it comes to houses.

House flipping can be a successful investment endeavor, but it usually requires financing. Common mortgage options are not always available for investment properties, but some options do still exist.

We’ll go over what loans are available to you, other expenses to consider when flipping houses, and the pros and cons of this investment.

Types of loans for flipping houses

The best loan for buying a house depends on your personal needs and financial situation. You’ll have to consider requirements, interest rates, loan terms, and any caveats that may limit how you can use the funds. Even if your options for an investment property are limited, we’ll go over seven possibilities.

Cash-out refinance loans

One popular option for buying a second property is a cash-out refinance. This kind of mortgage replaces your existing mortgage with a larger loan. You then get the extra funds to use for nearly whatever you need. As investment properties often require a larger down payment, you can put some of this money down while using the rest on renovating the property.

Most cash-out refinance loans are capped at 80% of your home equity. This means that if you have substantial equity and have paid off a good amount of your original mortgage, you might have six figures to work with.

This kind of loan might be a good choice for you if:

• You have a fair amount of equity in at least one other property
• Interest rates are lower than on your current mortgage
• You have a credit score of at least 580 and a debt-to-income ratio of below 50%
• You’re prepared to pay closing costs

Home equity loans and lines of credit

Home equity loans and home equity lines of credit (HELOC) are two other popular options for additional funding. These are both types of second mortgages, which means they borrow against the equity you’ve built in another property. Unlike a cash-out refinance though, these two types of loans result in a second mortgage payment every month because they don’t affect your primary mortgage.

The two are very similar, though there are some differences. While home equity loans are a lump-sum payment, a HELOC is a line of credit. Most home equity loans have a fixed interest rate, while most HELOCs have a variable one. There is a maximum amount you can withdraw during a certain period, but you don’t need to take all of it. Not all lenders offer HELOCs. For example, Rocket Mortgage® doesn’t offer HELOCs, though we do offer a Home Equity Loans.

This kind of loan might be a good choice for you if:

• You have a fair amount of equity in at least one other property
• You’re prepared to pay closing costs
• You have a credit score of at least 680 and a DTI of 43% or less (home equity loans only)
• You don’t know how much money you’ll need for renovations (HELOCs only)

Personal loans

Personal loans can be used for just about anything, including a down payment and renovation costs for house flipping. They can come from banks, credit unions, and other institutions and have a lot of flexibility with requirements, interest rates, and loan terms. They’re also pretty easy to apply for. However, personal loans are generally for lower amounts compared to mortgages, and often have higher interest rates.

Consider a personal loan if:

• You don’t need too much money and can probably keep it in five figures
• You don’t want to put your house or anything up as collateral

Hard money loans

Hard money loans are short-term loans that require collateral, often a house, and have a short application process. You can usually get your money quickly, within a week, and you’ll have a shorter time to pay it back. These loans come from private lenders and have more flexibility when it comes to requirements, though they can have high interest rates.

A hard money loan might be ideal for you if:

• You’re having trouble applying for traditional mortgages
• You don’t want a long repayment term
• You’re an experienced house flipper who knows you can renovate and sell quickly

Rehab loans

Rehab loans are also known as fix-and-flip, or renovation, loans. They require appraisals and have a similar application process to mortgages, though they are short-term. How much money you can get will depend on the after-repair value (ARV) of a home. Because this is estimated before the house is actually fixed, you can usually only borrow 75% of the estimate in case things don’t go as planned.

Keep in mind that some government-backed rehab loans, like the 203(k) Rehabilitation Mortgage, require residency and are not suitable for investment properties.

These loans can be a good option if:

• You’re looking for a short-term loan
• You’re an experienced house flipper and are confident your home can meet or exceed the estimated ARV
• You don’t want to put your primary residence up as collateral

Bridge loans

A bridge loan is a short-term loan often used to cover expenses between when someone purchases a home and when a larger loan or mortgage is approved. These can be risky if there’s a chance proper funding doesn’t work out. Interest rates are also usually high.

You might want to go for a bridge loan if:

• You’re fairly certain you’ll get long-term funding
• You found a property you simply can’t wait on
• You have a back-up plan if long-term funding fails
• You have a credit score of at least 740 and a DTI of less than 50%

Loans from personal connections

If you want to try an alternative route, or you have the right connections, you can always go the personal route. Maybe you have friends or family members who will go in on the project with you. You could also look for a real estate investment partner or even consider crowdfunding.

These might be good options for you if:

• You already have connections in the world of real estate investing    
• You have experience in crowdfunding
• You want to avoid high interest rates
• You’re willing to try a less conventional approach

Who offers loans to flip houses?

While traditional mortgages and home funding opportunities for an investment property might be limited, you actually have more options when it comes to where you can get money.

Your choices here are:

• Private lenders such as banks, credit unions, and mortgage companies
• Hard money lenders such as real estate investment companies
• Fintech companies
• Crowdfunding sources    

Pros and cons of house-flipping loans

When you borrow any significant amount of money, there are pros and cons to carefully weigh. When it comes to loans for house-flipping, these can be especially complicated.

The pros

Here are some of the advantages to consider:

• You have flexible financing options. As shown above, there are many options for house flipping funds.
• Fixer-uppers are less expensive than other homes. The kind of property you want for house flipping will usually be cheaper than a home that’s up to date in the same area.

The cons

Some of the disadvantages are:

• Your home might be put up as collateral. This means if you fall behind on payments for a second mortgage or a refinance, you can lose your house.
• Potential high costs. Depending on what kind of loan you get, you might be facing high interest rates, closing costs, or other required payments.
• Your investment might not pan out. When you sell a flipped home, there’s always the risk that you’ll only break even or worse, lose money. This means you might struggle to pay back the loan.

The bottom line: Carefully consider your house-flipping loan options

When it comes to financing an investment property for flipping, you have plenty of options, though many are riskier than regular mortgages. If you want something close to a traditional mortgage, you can consider cash-out refinances, home equity loans, or HELOCs. You could also choose from personal loans, rehab loans, bridge loans, or crowdfunding. Despite all these options, it’s important to weigh the hidden costs of house flipping and consider unexpected problems.

If you think you’re ready to purchase an investment property, start an application today with Rocket Mortgage.