Fix and Flip FAQ

Frequently Asked Questions
We can’t count the number of times in the last 16 years that we have been doing fix-and-flip loans at MMTC that we have received a “panic” call from a prospective investor because they were trying to use a conventional loan to purchase a fix-and-flip property, only to find out in the end that the conventional lender could not close the deal after all. Using a conventional loan for a fix-and-flip property can be like going to the podiatrist if you are experiencing chest pains. Meaning conventional lenders are not specialists for fix-and-flip investors. Conversely, you would not use a fix-and-flip loan for a home that you intend to buy and occupy that requires no repairs. Specific roadblocks to using conventional financing for rehab properties include and may not be limited to:
A. To obtain a conventional mortgage, the property you are purchasing typically has to be in “move-in”, “habitable” condition. This is because conventional loans are sold in the secondary market to government sponsored agencies like FHLMC and FNMA, so the properties and borrowers must meet the standard guidelines of these agencies.

As you know or may be learning, many fix-and-flip properties that are great deals are not in move-in condition at the time the investor is purchasing them. Often, the properties are bank owned foreclosures where some damage has been done to the property, or the prior owner who was foreclosed on removed appliances, furnaces, light fixtures, you name it. A conventional lender’s appraiser would have to mark the property “not habitable” if it is missing essentials like carpet, furnace, toilets, etc., thereby rendering the property unacceptable for most conventional lenders.

But, an experienced fix-and-flip lender works with properties that need repairs every single day, because that is what we specialize in.

B. Conventional lenders typically do not lend funds towards the repair of the property whereas fix-and-flip lenders do, meaning less funds out of your own pocket.

C. Conventional lenders usually have more requirements and take
longer to close. This puts an investor at a disadvantage because a shorter closing time is more attractive to the distressed seller of the property.

D. Conventional loan rates are granted with the understanding that you will
NOT be paying off the loan within a short amount of time (like within one year of less). Because of lower rates on conventional loans, if the loan is paid off within a short period (which is the intent for a fix-and-flip investor), the lender who is making the loan does not earn their required yield (unless they have put a prepayment penalty on the loan). If the loan pays off too early, the mortgage broker may be required to pay back all or a portion of the fee they received on the loan to the underlying lender that funded the loan. Thus, particularly in today’s tightened mortgage lending environment, most reputable mortgage brokers and bankers will not recommend or allow long-term conventional mortgages for fix-and-flip investors.