If you have a good relationship with a local banker, excellent credit, and other significant assets besides your home and retirement account, you can usually obtain 100% financing for a flip. Unfortunately, most people do not qualify for such favorable terms.
There is a funny loophole that we can use, however. Most people who buy real estate will be able to borrow 75% or 80% of the appraised value or the purchase price, whichever is less. This prevents you from being able to borrow the entire purchase price just because you were brilliant and found an incredible bargain. On the other hand, if you have a credible plan to improve the property, you can base your borrowing on what the house will be worth when you are finished, not today’s purchase price or appraised value.
Loan to Value Calculation
Suppose you need to borrow $160,000 to buy and fix up a house, and you want to obtain 100% financing from a lender who requires the loan to be 75% of the completed value of the house. How much does the house need to be worth to support this loan?
75 $160,000 is the same as
100 what number?
160,000 x 100 = 16,000,000
16,000,000 ÷ 75 = $213,333
Most people would intuitively say the house must be worth
$200,000, or 25% more than the loan. But, if the house is worth
$200,000 and you borrow $160,000, your loan-to-value ratio is too high, it will be 80%. In reality, you must increase the value by 33.3% for the loan to be 75% of the final value.
Other than this loophole, or excellent connections with a banker, you will generally be able to secure 100% financing in only two circumstances. The first is if you do a homeowner flip of your own residence. In many circumstances, you can still get 100% of the money to buy a personal residence. The other circumstance is the lease option flip, in which you are not really borrowing money at all. In reality, you are just renting a house with the right to buy it (and resell it the same day) if you exercise your option. Remember, though, not all leases have options in them. This is a separately negotiated item with the landlord.