Can/should you take out a mortgage on a property you plan to flip (buy, fix, and sell)? Then have the buyer assume the mortgage?
Traditional home loans will probably not be an option for buying investment properties — at least when you’re starting out.
The good news is that loans from banks and traditional lenders are relatively inexpensive: interest rates are among the lowest you’ll find for investment properties (but you’ll still have to pay closing costs).
Unfortunately, these loans are not always practical.
One of the main challenges with using a traditional lender is the time it takes to close a loan. Lenders require that you fill out an extensive application, and they’ll go through your finances with a fine-toothed comb. If they see anything that raises questions, they’ll ask for more documentation, and they’ll take even more time to review your application.
The process rarely takes less than 30 days (45 or 90 days might be more realistic), and investment opportunities often move too fast for that timeline. Especially if foreclosures or short sales are part of your strategy, you’re likely to be frustrated by the speed of traditional lenders.
Traditional lenders base their lending decisions on your ability to repay a loan. They’ll look at how much you earn each month compared to required monthly loan payments to calculate a debt to income ratio. If you’re a real estate investor or otherwise self-employed, you might not have the type of “income” they’re looking for (lenders like to see W-2 forms and pay stubs).
Lenders also compare the value of the property you’re buying to the loan you’re asking for. Known as a loan to value ratio, conventional lenders often prefer to keep that number below 80 percent, although it is possible to get FHA loans with as little as 3.5 percent down. When you’re buying a house for flipping, it’s probably not worth much in its current state — but you need enough money to purchase the property and pay for improvements, which might end up amounting to more than the house is even worth.
In summary, it is possible to take out a mortgage on a property you want to flip, but it is not timely and this could cost you. Taking out a loan with a low down payment and higher interest rate could end up costing more than the property will be worth.
However, if you don’t have the resources to buy properties outright, loans may be your only option. If this is the case and you still want to try your hand at flipping, you will want to make sure that:
- You have great credit.
- You have plenty of cash on hand.
- You know the market.
Having these things can help you go through the process of buying and flipping faster and more successfully.