While mortgage companies are an important source of funds for home buyers, most flippers need to look for commercial loan money. That used to mean regular banks only. Today, though, credit unions also loan money for short-term investments. Their interest rates will usually be at least 1% higher than home loan interest rates.
Be sure to shop carefully for your loan. Some lenders quote interest rates as “prime plus 1%,” while others might quote you “150 basis points over LIBOR.” One hundred fifty basis points is the same as 1.5%, so that translates to LIBOR (or London Interbank Offered Rate, which is an interest rate index for loans that banks make to each other) plus 1.5%. The trick is, LIBOR is often much lower than prime, so “prime plus 1” might be a higher interest rate than “LIBOR plus 1.5.”
You might be able to obtain seller financing for many flips. Especially with rental houses, the owner is usually comfortable receiving a monthly check from his or her property. That check can be rent, or it can be your mortgage payment, it usually does not matter. Be careful of one thing, though. Many owners who hold financing do so for income tax reasons. They do not want a lot of income in any one year, which they would have with a straightforward sale. Those owners might have a prepayment penalty in the loan documents you sign. The prepayment penalty might require you to pay extra money, usually as much as 10%, if you pay off the loan before the maturity date. A penalty like that can dramatically change the economics of your flip, so be careful.