Flipping Houses with a Conventional Loan: Navigating Costs and Risks
As a seasoned mortgage professional, I often hear questions about flipping houses with a conventional loan. The answer my mother would've given me as a child—'You can, but may you?'—resonates well here. When considering whether to use a conventional loan for a house flip, you need to weigh the advantages and disadvantages against the skyrocketing costs and risks associated with such a endeavor.
Understanding Conventional Loans
A conventional loan is a mortgage secured by a deed to a property, offering two primary types: owner-occupied and non-owner-occupied properties. While the interest rates on non-owner-occupied properties tend to be higher, typically 0.5 to 0.75 percentage points above those for owner-occupied properties, the primary disadvantage is the significant upfront fees. These can include points, origination fees, and appraisal costs, making them a substantial financial burden.
Comparing Conventional Loans to Hard Money Loans
Hard money loans, on the other hand, offer a faster and less stringent approval process. They are often used in house flipping due to their lower LTV (Loan-to-Value) requirements and faster closing processes. A typical hard money loan might come with higher points and interest rates, but closing can be completed in as little as 10 days, allowing for quicker returns.
The main advantage of a hard money loan is that it provides a way to close the deal quickly without stringent income verification or credit checks, which are typical in traditional bank lending. This can be a significant factor if you're trying to move quickly in a competitive market. However, the hassle involved in applying for a hard money loan and the possibility of a lower offer being conditional on certain loan terms may not be ideal for every situation.
Can You Flip a House with a Conventional Loan?
Technically, yes, you can use a conventional loan to flip a house, even if your intention is to sell the property quickly. However, you may not be able to do it without facing potential consequences. Conventional loans are designed for owner-occupied properties, and if your lender discovers your intention to flip the house, the loan can be called immediately due and payable.
While you can use a conventional loan to flip a house, there are risks involved. The loan documents typically state that the property must be owner-occupied, and you face the possibility of penalties if these conditions are not met. Misrepresenting your intentions can lead to a quick end to your loan and potential legal ramifications.
Best Alternative: Hard Money Loan
The best alternative to overcome the drawbacks of a conventional loan for flipping a house is to use a hard money loan. Hard money loans are often used by experienced house flippers due to their unique benefits. These loans require less credit verification and closing can occur much more quickly, allowing for a faster return on investment.
If you’re in a situation where a conventional loan is not feasible due to high upfront costs or the need to have the property owner-occupied, a hard money loan is a viable option. It’s important to weigh the costs and risks associated with each type of loan to determine the best course of action for your specific situation.
In conclusion, flipping houses with a conventional loan is possible, but the costs and risks must be carefully considered. If speed and flexibility are crucial, a hard money loan may be the better choice. For detailed guidance on the best loan options for flipping houses, consider consulting with a mortgage expert.