There are countless reasons to be interested in flipping houses, whether your friends and family routinely praise you for your handiness or you’re looking to build up your finances in today’s hot housing market.
But if you’re a little short on cash and your credit score isn’t high enough to qualify for traditional types of financing, it can be difficult to find a pathway into flipping homes.
Fortunately, if you’re working from a capital deficit and a low credit score, there are still methods you can use to purchase a house to flip. This helpful guide will explain everything you need to know about how to flip houses with no money and bad credit so you can become a successful house flipper today.
Can You Flip a House With Bad Credit?
First, let’s address the problem of a poor credit score and how that might impact your ability to house flip. Credit scores are based on several factors, including your credit history, the number of accounts you have open, and how often you are late or delinquent on your payments.1
Credit scores are then assigned on a range from poor to excellent. While there is some variation depending on the company calculating your score, in general, scores are evaluated as follows:2
- 800-850 is considered excellent
- 740-799 is very good
- 670-739 is good
- 580-669 is fair
- 579 and below is poor
If you’re applying for a loan, traditional lenders usually rank those with scores of 670 or higher as lower-risk borrowers, meaning they are more likely to offer you favorable terms on a loan. If your score is between 580 to 669, you’re considered a subprime borrower and may not be offered a loan or might receive an offer with less favorable terms.
So, if you have less than stellar credit, you may or may not be eligible for a loan. What you can qualify for will depend on the lender, your score, and what you plan to do with the funds.
6 Ways to Flip Houses With No Money and Bad Credit
Maybe your situation is further complicated by a bank account that lacks sufficient funds to purchase the home you want to flip. If you have both poor credit and no money, it may seem like lenders won’t consider you a viable candidate for a fix and flip loan. However, if you’re willing to get creative, you might still be able to find a way to fund your house-flipping venture.
Let’s break down six methods you can explore.
#1: Consider a Private Loan
Large lending companies aren’t going to provide you with a house-flipping loan if you have poor credit and cannot provide proof that you have enough money to pay back the loan on their terms. In this case, consider securing a private loan.
A private loan is simply a loan that you obtain from someone who has enough money to lend you.3 If you can find someone willing to be your financial backer, there are several advantages to private loans, including:
- More flexibility with payment terms since you’re dealing directly with the private lender
- Better interest rates than other high-interest rate loan options
- Few or no penalties for late payments
That being said, there can be some drawbacks to this kind of loan. Typically the home is used as collateral for the loan. If you fail to fix and sell the property in the agreed-upon timeframe, the private money lender can take the home from you.
#2: Try a Hard Money Lender
If you don’t have access to a private lender, you might want to consider a hard money loan. Like a private loan, a hard money loan uses the property you purchase as collateral for the loan.4
This can be advantageous if you don’t have good credit, as your credit score isn’t typically considered as criteria for offering you a loan. Because your credit score won’t determine whether or not you receive financing, hard money loans aren’t done through banks. Instead, they are usually funded by private companies or individuals.
However, there can be some downsides to hard money loans. These could include:
- Potential loss of property if you can’t repay the loan
- High-interest rates
- Very short payment terms
- Lower loan-to-value ratios, meaning you may not be able to secure as much funding as you need
Hard money loans can be risky, especially if you have trouble selling the home you’re repairing quickly after you finish it.
#3: Apply for a Home Equity Loan
If you own your home and have built up some equity, you can consider a home equity loan as a means of financing your house flipping project. A home equity loan is essentially a second mortgage on your existing home. It doesn’t replace the mortgage you already have, however, so you’d be required to make two monthly loan payments.5
There are a couple of advantageous reasons for a home equity loan. One advantage of a home equity loan is that your lender will consider your home to be the collateral. This means you won’t have to have cash on hand, nor will your credit score be as much of an impediment.
However, home equity loans have some drawbacks, including:
- They require a significant amount of equity in your home
- Lenders typically won’t lend more than 80% of your existing equity
- Your loan is backed by your home, so if you don’t pay, you can lose your home
- You need to have enough cash flow to pay both your mortgage and home equity loan
These factors are important to consider before you apply for a home equity loan. No borrower wants to find themselves in a position where they stand to lose both their real estate investment property and their home if they cannot pay off their personal loan. If you’re interested in an investment property, be sure you learn how to buy an investment property with bad credit.
#4: Team Up With a Business Partner
Another option is to try to find a business partner to work with. Flipping homes is an increasingly popular endeavor, and by pooling your resources, you might qualify for better financing. Moreover, working with a partner who brings a different skill set to the table can make flipping a home much easier.
However, before you go all in with a business partner, make sure that you:
- Have a written contract signed by both parties
- Clearly outline who will perform which tasks
- Clarify how the profits will be split when you sell the house
It’s very important to launch your business partnership with a contract to ensure that the project goes smoothly and you’re protected if anything goes wrong.
#5: Pool Resources With Crowdfunding
Crowdfunding is another option you can use to finance the purchase of a home to flip.6 In crowdfunding, you’ll use the resources of several individuals to secure the finances you need. To raise enough money to fund the purchase and repairs of a home, you’ll likely need to implement a crowdfunding resource that is geared specifically towards real estate investing and real estate investors.
Note, however, that crowdfunding loans can have some pretty strict terms, and you might end up paying a high-interest rate on the loan.
#6: Investigate a Sale-Leaseback Option
Finally, an alternative to the other options is a sale-leaseback. In a sale-leaseback, you sell your current home and receive cash in return. You then stay in the home as a renter while using the cash you received to fund other ventures, like buying and flipping houses for a profit. The advantage of sale-leaseback agreements is that your current financial status and credit history may not be as big of a hindrance as in some of the other financing options.
Other Considerations When Flipping Houses
Remember that buying the property you want to flip is only one part of the financial commitment. When you house flip, you usually have to spend significant amounts of money to make repairs and upgrades. Otherwise, you risk not making money off of the project.
House flippers should make sure they can secure enough financing for the following expenses:
- Loan costs and fees
- Paying the property taxes on the home
- Homeowners insurance
- Keeping the utilities turned on
- Supplies to renovate the home
- Contractor fees to pay professionals for things you cannot do on your own
- Permit fees
- Realtor fees when the home sells
Finally, when you sell the home, you might be subject to short-term capital gains tax. If you purchase, flip, and sell the home within one year, you’ll likely have to pay capital gains tax on the profit. This can cut into the amount of money you make on the sale.
Flipping houses can be a lucrative operation if you have the handyman skills necessary to fix up homes in need of a little TLC. However, if you have bad credit and little money in the bank, it becomes a bit more challenging to secure the funds you need to start your house-flipping venture. There are several fix and flip loans for beginners with bad credit that you might be able to qualify for, but the loan terms of these can be prohibitive to many borrowers.
- Equifax. How Are Credit Scores Calculated? https://www.equifax.com/personal/education/credit/score/how-is-credit-score-calculated/
- Equifax. What is a Good Credit Score? https://www.equifax.com/personal/education/credit/score/what-is-a-good-credit-score/
- FindLaw. Home Loans from Family and Friends. https://www.findlaw.com/realestate/mortgages-equity-loans/home-loans-from-family-and-friends.html
- Investopedia. Hard Money Loan. https://www.investopedia.com/terms/h/hard_money_loan.asp
- Investopedia. Home Equity Loan with Bad Credit. https://www.investopedia.com/mortgage/heloc/bad-credit/
- Investopedia. How to Get a Loan to Finance a House. https://www.investopedia.com/articles/investing/012617/how-get-loan-flip-house