Investors use a variety of different lending options to finance house flipping. If you have bad credit, you will have problems getting financing because lenders typically require credit scores above 620 for secured loans and scores above 700 for unsecured loans. If you have poor credit, consider asking a family member to cosign to improve your chances of obtaining financing. You should also hire a licensed home inspector to ensure that you do not buy any homes that require far more work than the amount for which you budgeted.
Locate your last two years' W2s and your personal tax returns. If you are self-employed, you also need to locate your business tax returns for the last two years. Go online to your bank's website and print out at least 60 days of statements for all of your deposit accounts and any investment accounts that you have. If you have a 401k at work, print out a copy of your current holdings.
Visit at least three locally based lenders to submit a preliminary application by providing the loan officer with your name, Social Security number, date of birth and your account and income documentation. The loan officer will pull your credit and tell you about the financing options available to you. If you own a home and have equity in it, you can apply for a home equity line of credit. You can also apply for a mortgage with which you can buy the house you intend to flip or apply for an unsecured loan. If you plan to buy a very inexpensive home, you can also apply for a credit card with a high line limit and use it to buy the property. Ask the lender how much you can borrow for each type of loan, based on your income and credit score.
Contact a few local credit unions to find out if you are eligible to become a member and what kind of loan products you could use to finance the flipping of a home. Since credit unions are not-for-profit organizations, credit union members can often borrow money for less than people who obtain financing through banks. Compare the credit union loan offerings with the terms available at the bank and decide which lender best suits your needs. If you cannot obtain financing through a bank or credit union, you can contact local investment firms as some offer loans for investors but rates are usually much higher than with standard loans.
Find a house to flip and agree on a purchase price with the seller. Take the sales contract back to your lender and submit a formal application. If you intend to use your own home as collateral for a loan, provide the lender with your homeowners insurance information and your warranty deed. If you intend to use a purchase mortgage to buy the home, then you must pay for a home appraisal, which normally costs between $300 and $400. If you qualify for an unsecured loan or line of credit, the lender requires no further information from you. Complete the application, sign any necessary paperwork and after obtaining final approval, you must close the loan.
If you intend to use a cosigner for your application, be aware that most banks only allow cosigners to sign on loans secured by residential property if the cosigners have an ownership share in the home. You must also provide the lender with bank statements, personal information and income verification for the cosigner.
When you flip a home, you must pay taxes on the sale proceeds. If you sell a home within 12 months of buying it, you report the income from the sale as ordinary income and pay taxes at your normal rate. If you sell a home more than 12 months after you buy it, then you pay capital gains tax instead of ordinary income tax on the proceeds. As of 2011, capital gains are taxed at 15 percent, whereas ordinary income rates range from 15 to 35 percent.
- The Federal Reserver Board: What You Should Know About Home Equity Lines of Credit
- Bankrate.com; Tax Consequences of Flipping Real Estate; Kay Bell; February 2008
- Bankrate.com: Five Tips For Financing Investment Property; Jennifer Acosta Scott; December 2009
- Federal Trade Commission: Home Equity Credit Lines