Planning To Flip Houses? What Are Your Most Viable Financing Options?

If you're planning to embark on a new venture of flipping houses for profit, you may already be scouting out ways to save yourself money on renovation and supply costs. But to even get to this point, you'll need a solid financing option for the purchasing process—and for some flips, conventional mortgages and other traditional financing methods just aren't an option. Read on to learn more about the importance of hard money lending in the flipping process and what you can expect from the process. 

What is Hard Money Lending? 

The term "hard money lending" simply refers to a short-term loan that is secured by a piece of real estate. These loans are a favorite financing option for fix-and-flippers, as they permit quick closings and relaxed approval qualifications. While many traditional mortgages require a property appraisal before funds are extended, hard money lenders will issue loans even for damaged properties, as long as they're in an area that offers some upward potential.

By that same token, hard money loans don't depend nearly as much on the borrower's financial statistics as other types of loans. Because the loan is secured by the property itself, a borrower with a low credit score or a recent bankruptcy isn't much of a credit risk; if a default does take place, the lender needs only to gain title to the property to recoup the loan principal.

Because hard money lending inherently involves more risk (from the lender perspective) than so-called "soft money lending," there are some very strict requirements when it comes to payback periods and other loan terms. On the plus side, hard money lending can offer a quick, hassle-free closing process, ensuring that you're able to swoop in and purchase a flip-worthy home as soon as it hits the market instead of waiting for pre-approvals and other financing hoops. 

What Else Should You Know? 

To obtain a hard money loan, you'll need to start by seeking out a lender that specializes in this type of loan, including a venture capital firm. Most traditional lenders like banks and credit unions don't deal in hard money loans; on the other hand, a guaranteed rate of return can make these loans attractive to venture capitalists, entrepreneurs, and hedge fund managers. Once you've identified a lender and a property, the process will often be over quite quickly, with many hard money transactions moving to closing within just a week or two of the accepted offer. 

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