Applying To A Real Estate Lender For Your First Fix And Flip Loan? Here’s What To Expect

Cofounder of InstaLend, a non-bank real estate lender providing loans on single-family and multi-family properties for acquisition and rehab.

When you’re applying to a real estate lender for your first fix and flip loan, there’s a lot to keep track of. While you might have gone through a lending process when you purchased the home you live in, the fix and flip loan process is a different experience. 

From getting all the right documentation to finally paying off the loan, here’s what to expect when applying for your first fix and flip loan. 

1. Forming A Business Entity And Submitting The Right Documentation 

When you’re flipping homes, you’re in business for yourself. So to protect yourself and your assets, you may want to form a business entity — preferably an LLC — before you apply to borrow a loan. 

During the loan application process, you’ll have to submit documentation for your LLC to show what kind of LLC you have and your role within it. That documentation includes your LLC’s EIN letter, articles of organization and certificate of good standing. Depending on which state you’re in, you might also have to include your LLC’s operating agreement. This documentation will help the real estate lender validate that you’re running a legitimate LLC in good standing with the state and that you’re fit for purchasing that particular property.

2. Getting Property and Personal Documents In Order 

You’ll also have to provide the lender with property documents, meaning, a signed purchase contract and an itemized renovation budget.

The lender will also run a credit and background check on you, the borrower (note: they might refer to you as the “guarantor”), to verify your FICO score and background. 

3. Going Through The Appraisal Process

You’ve now given the lender your LLC and property documents. From here, the real estate lender will order an appraisal on the property to ensure its “as-is value” (how much it’s worth in its current condition) and its “after-renovation value” (how much it will be worth after you’ve finished renovating it). 

Once the lender receives this report, they’ll run risk metrics and calculate the loan amount you qualify for.  

4. Sorting Out The Title Documents And Closing The Loan

The lender will then finalize that loan amount and send a request to the title company to ensure that there aren’t any outstanding liens, violations or liabilities against the property. In turn, the title company will commit to insuring the property against any future liabilities. 

This commitment protects the property for the lender and also protects your investment in the event of any unknown claims. Unknown claims can include claims that did not show up on the title during the initial title search — or were missed or left out by the title company. The lender will also require you to have property insurance to protect the property from hazards, floods (if the property is in a flood zone), fire damage and so forth. 

After everything with the title documents checks out, the lender will close the loan, placing a lien on the property (via the title company) and filing a Uniform Commercial Code (UCC) lien. The UCC lien makes it easier for the lender to collect any remaining payments in the event that you default on your debts or end up filing for bankruptcy. 

5. Entering The Interest Servicing Stage

Now that the loan has closed, you’re responsible for paying interest on it each month. 

Typically, the real estate lender will decide to use a third-party loan servicing company for interest servicing. If your lender takes that route, the third-party loan servicing company will contact you and set you up with a servicing account. You’ll then make payments to that third party rather than directly to the lender. 

6. Requesting a Draw 

Something important to keep in mind is that real estate lenders usually won’t release 100% of your loan funding upfront. Instead, they’ll give you only a portion of the loan at closing so that you can acquire the property. 

The lender will hold the remainder of your funds in a construction escrow. You’ll be expected to either partially or fully renovate the property and then request reimbursement for that work in the form of a draw. In most cases, the lender will send an inspector to your property to verify that the renovation work is complete. Based on the inspector’s report that comes out of that onsite visit, the lender will decide whether or not to release the additional loan funds to you.  

7. Paying Off The Loan 

Finally, there’s the step where you can breathe a little easier. When you’re ready to repay the loan, you can request a loan payoff from the lender (of course, this is the outstanding loan balance). Once you pay off the loan, the lender will release their lien on the property. 

As you continue scaling your home flipping business and staying on top of predictions for future trends in the industry to make smart decisions, you’ll go through the fix and flip loan process again. But, with experience, you’ll breeze through it faster each time — and take your business to new heights. 

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