HOW TO USE HARD MONEY LOANS FOR FLIPPING HOUSES
Investors are always on the search for funding before they start a new project. House flippers looking for capital should consider applying for a hard money loan. Lenders who specialize in offering hard money loans represent a viable funding solution that many real estate flippers need.
The Wonderful World of House Flippers and Proof of Funds
Before you start looking for financing, it makes sense to first discuss the unique challenges faced by house flippers to fully understand funding requirements and how important timing can be. There are many important distinctions that should be made between buying a home for your family to live in and buying a home for the purpose of improving it and flipping it for a profit.
First, you have to select a property that is priced low enough so that you can make some strategic improvements to bolster the selling price enough to make a profit. Homes that fit this profile are in high demand. There is a lot of competition for the limited number of properties for sale that meet the strict guidelines necessary to make money this way.
In order to compete against other investors, a real estate agent or owner will require that you show proof of funds before they allow you to take the property off the market and tie it up before closing. This is usually the first big financial challenge that home flippers face as they compete for the best properties.
Investors with cash on hand compete for these choice houses. Hard money lenders will provide a proof of funds document for approved borrowers on demand that realtors will accept. This document means you can compete and buy properties alongside the many all-cash investors you will compete against.
If you can’t get past this first step, then you are wasting your time. New home flippers often run into this roadblock upfront and lose a great property because they haven’t got proof of funds.
Hard Money Loans Vs. Traditional Banking
Hard money loans and traditional loans could not be more different in nature. First, it is important to understand that hard money loans are designed specifically for investment projects like house flipping. Comparatively, traditional home loans are designed for properties in “move-in” condition.
Another distinct benefit of working with hard money lenders is that they can usually fund a loan in a few days as compared with four to six weeks or longer. Anxious sellers with hot investment properties may cancel the sales contract if the closing drags out longer than the agreed-upon date. In fact, a seller might not agree to sell it to you in the first place if they have any reason to worry that the closing will not be speedy and efficient.
The credit requirements for hard money loans are much less strict than they are for traditional loans, and practically nonexistent for many. Since hard money lenders view the collateral of the home as their number one requirement for qualification purposes, credit is not usually a major problem.
Income requirements also take a backseat to the home when applying for a hard money loan. Traditional lenders will want proof of consistent, predictable income that verifies you can easily pay the mortgage. Obviously, this may pose problems for investors who are speculators and typically self-employed with erratic income and high debt-to-income ratios.
An experienced hard money lender can provide advice and funds for a home flipper. Better than traditional financing for many reasons, hard money lenders offer a win-win partnership to ambitious house flippers.