Flipping houses is an attractive venture for anyone who wants to see big profits. But, as the old saying goes, you need to have money to make money.
The lack of capital can be enough to deter most hopeful flippers. Fortunately, you can get the funds you need through financing options like renovation loans.
This guide is here to help you out by breaking down the different types of renovation loans. By the end, you’ll know which option will help you see the greatest return on your investment.
How do home improvement loans work? Let’s find out.
Types of Renovation Loans for Investment Property
See below for an overview of your financing options for an investment property.
1. FHA 203(K) Loan (From the Federal Housing Administration)
An FHA 203(K) is often the most popular because it is government-backed by the Federal Housing Administration. The FHA guarantees coverage for renovations, making it easier to make monthly payments.
Borrowers tend to favor the FHA 203(K) for its lower interest rates. Plus, you can qualify with a credit score as low as 500. If you have a credit score of 580 or higher, you’ll only have to make a 3.5% down payment.
While FHA 203(K)s can be handy options, you should be aware of their limitations. For instance, borrowers only have six months to complete the renovations. This short timeframe means that you need to coordinate all repairs efficiently.
Another FHA 203(K) stipulation is that the investor must reside on the property for at least 12 months. If you need to sell the property sooner, you may want to consider another financing option.
2. Self-Directed IRA Loan
The Self-Directed IRA loan works like a retirement account. This loan helps you dedicate a portion of your retirement funds towards investments if you have limited investment options.
A real estate investor might encourage you to choose this financing option because they know that you can build your retirement and earn an income through your rental property simultaneously.
It’s important to note that it’s for more seasoned investors who are comfortable putting funds towards renovations. If you are new to investing in property and aren’t sure how to handle your investments, an NRIA provider can offer special funding programs and advise you about financing options.
3. Fannie Mae Homestyle Loan
Some home improvement loans, such as the Fannie Mae Homestyle Loan, are more flexible in the eligibility requirements and uses of the borrowed funds.
This option lets you borrow up to 85% of the value of the rental property after repairs. This loan type covers everything from patio to comfort windows financing.
The biggest drawback is that every renovation must have contractor approval, which might cause an issue if you were hoping to do much of the renovation yourself. The down payment is also high compared to other options, which might prove to be a hurdle for a homeowner with a high debt to income ratio.
A high debt to income ratio might negatively affect your ability to manage monthly payments, hindering you from paying back the money you’ve borrowed.
4. Hard Money Loan
Hard money loans are short-term financing options that are easy to apply for; therefore, they are popular among many homeowners looking to invest in real estate. Lenders are usually open to negotiations and will typically be flexible to avoid paying high interest rates and other factors.
The term “hard money” comes from the fact that your property’s value determines the loan terms. While lenders are flexible, they can afford to negotiate because they generally work with experienced and successful buyers.
If you have never borrowed money for a renovation or are an experienced real estate investor, you may have a harder time applying for hard money loans.
Protecting Your Investment Property the Right Way
Choosing a renovation loan can be challenging, especially since each option comes with its list of stipulations. If you are inexperienced with investing, or you’re unsure of what steps to take after you’ve chosen a financing option, we can help you further understand how to invest smartly and build your future in renovating rental properties.
We want your investment properties to have protection because we know the value of renovating homes and investing wisely. Homeowner Funding can help you achieve your financial goals safely. Contact us today to learn about our funding options!