Conventional lending is one of the three options we use to find money to flip houses. See below for the other two.
What is Conventional Lending?
A conventional loan is any type of home buyer’s loan that is not offered or secured by a government entity, such as the Federal Housing Administration (FHA), the U.S. Department of Veterans Affairs (VA) or the USDA Rural Housing Service. Instead, these loans are available through or guaranteed by a private lender (banks, credit unions, mortgage companies) or the two government-sponsored enterprises, the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac).
Most of us can’t use conventional lending to flip houses. They will take weeks to close, require personal credit scores and debt to income ratios, won’t lend on unlivable or non-owner occupied properties, the list goes on… and on… and on. These lenders view the property like the car dealership views the car they are trying to finance for you. They only want to attach to your personal, certifiable cash flow.
That isn’t to say this is a total waste of time for everyone. Do you have equity in another property? You probably do if you are a home owner. If so, you can borrow against the equity in that property to open a Home Equity Line of Credit (HELOC). These are great because they revolve just like a credit card. That means they are fast to draw and repay. The down side is that you are risking the other property (maybe your own house!) and your credit. That’s right, the consequences are pretty stiff. However, the interest rates are usually the best you will find and you won’t pay points upfront or suffer downtime when you really need the money (draw) by Tuesday.
We create a HELOC, in the name of a business, for every apartment building we own. This turns each apartment building into a credit card with a revolving line of credit. We do this so that our money is always invested in real estate, even when we aren’t using it to flip a house. The building’s cash flow (rent) either pays interest while we flip a property at a higher rate of return, or pays down equity. The best part is the limit (the equity) rises over the years.
Where are Conventional Lenders?
You can walk into almost any bank if you have a rare deal that can be financed directly. They all deal with personal mortgage loans on single family, townhomes, and condominium residential properties. The mortgages are then normally sold on the secondary market after the loan is issued.
That means the lenders have to follow pricing guidelines given by Fannie or Freddie. That’s right! The bank is giving you a mortgage with other people’s money. These other people are stock market investors that make up the secondary mortgage market. This keeps the rates and terms fairly competitive.
If you would like a personal HELOC on another property then you should shop around. Almost all major banks do personal HELOCs on single family, townhomes, and condominium residential properties. However, the rates on HELOCs vary by lender.
Unlike mortgages, HELOCs normally stay on the lender’s portfolio. That means the lenders don’t have to meet the guidelines for the secondary market. They only have to meet the looser lending regulations. Each lender can create their own equity line products. That’s why you need to shop around for the best rate.
If you would like a HELOC in the name of a business, then you may have to search even harder. Not all major banks do business loans. Your best bet is going to smaller banks and credit unions that are willing to take more risk. Be prepared to show the tax returns of your business as well as profit and loss (P&L) statements for at least 2 years.
Alternatives to Conventional Lending
There are two other options we use to find money to flip houses.