Fix and flip loans and financing

Most flips are not financed with a mortgage. A conventional lender wants an owner-occupant, a habitable property and a thirty-year horizon; a flip is none of those.

What fills the gap is asset-based lending priced on the property rather than the borrower, at rates that look alarming until you notice the term is eight months rather than thirty years.

The options, compared#

Hard money is the default and the rest of this article is mostly about it.

Private lenders — an individual with capital, often someone you know. Terms are whatever you agree. Cheaper and faster than institutional hard money, and the risk is that a personal relationship now has a lien attached to it.

A line of credit secured on another property or on a portfolio is the cheapest borrowed money available to an experienced flipper, and it requires already owning something.

Cash removes the financing risk entirely and is what auction purchases require. It also concentrates your capital in one deal.

FHA 203k is not a flip loan. It requires owner-occupancy. It is listed here because it appears in flip searches constantly and using it on a property you do not live in is mortgage fraud, not a loophole.

How a hard money loan is actually sized#

Two constraints, and the lower one binds.

Loan-to-ARV. Commonly capped at 70–75% of after repair value. On an ARV of $325,000 at 70%, the maximum total loan is $227,500 regardless of what you are paying or spending.

Loan-to-cost. Often expressed as a percentage of purchase plus a percentage of renovation — for example 85% of purchase and 100% of rehab.

Worked through, on a $170,000 purchase with $58,000 of renovation and a $325,000 ARV:

Plus closing costs, points, and the working capital to fund renovation stages before draws reimburse you.

The lender uses its own ARV, not yours. It orders a valuation and lends against that figure. A gap between your number and theirs comes out of your pocket, and it is the most common reason a deal that penciled at offer requires more cash at closing than expected.

What a flip loan actually costs#

The headline rate is the least important number.

Points are paid on day one and do not amortise. On a short loan they are a much larger share of total cost than the rate. Two points on an eight-month loan is a meaningful percentage of the borrowed amount before any interest.

Interest is usually charged on the full loan, including undrawn renovation funds, in some structures. Ask whether interest accrues on the drawn balance or the committed amount — the difference over eight months is real money.

The extension fee is the one that catches people. Renovations run late. A twelve-month loan on a project you believed was six months is cheap insurance compared with paying a point to extend at month seven.

Run your own numbers in the hard money calculator — it adds points, fees and draw costs to the interest and gives the effective annualised rate, which is the figure that makes two lenders comparable.

The draw schedule, and why it needs working capital#

Renovation funds are not handed over at closing. The lender holds them and releases them in stages.

The sequence, every time:

1. You complete a stage of work
2. You pay the contractor for it
3. You request a draw
4. The lender sends an inspector
5. The lender funds, usually a few days later

You pay first and get reimbursed. That is the part first-time flippers miss. A borrower with exactly the down payment and nothing else cannot fund stage one, and the project stalls before it starts.

Budget working capital of at least one stage's cost, and more if your contractor wants a deposit. A typical schedule releases in three to five draws against demolition, rough-in, finishes and completion.

Inspection delays are holding cost. Each draw takes days. Five draws with a four-day turnaround each is nearly three weeks of interest for work already done.

What lenders actually check#

Less than a mortgage underwriter, but not nothing.

The deal. ARV, purchase price, renovation scope and budget, and the exit. This is most of the decision.

Their own valuation. Ordered independently. Yours is an input, not the answer.

Your liquidity. Cash reserves after closing. A borrower with no cushion is a borrower who cannot fund a draw or absorb an overrun.

Experience. Completed projects matter. First-time borrowers get lower leverage, higher points, or both. Some lenders will not lend to a first-timer without a partner who has a track record.

Credit, lightly. A minimum score, recent bankruptcies and foreclosures, and pricing adjustments. Far less weight than a conventional loan.

The exit. How the loan gets repaid — sale, or refinance into a rental loan. A lender will ask, and an answer of "I will sell it" without evidence that comparable properties sell is a weak one.

Financing an auction purchase#

Foreclosure auctions require certified funds the same day or within twenty-four hours. There is no mortgage contingency and no closing period.

The workable routes:

Arrange hard money in advance and use it as cash at the sale. The lender pre-approves you and often the specific property, and funds on the day. Some lenders run facilities specifically for this.

Buy with cash, refinance immediately after. A cash-out or rate-and-term refinance into a rehab loan once you hold the property. This requires the cash first.

Do not bid without funds in place. Failing to fund forfeits your deposit and in some jurisdictions bars you from future sales.

And in redemption states, price the wait. In about half the states the former owner can reclaim the property after the auction. Across 326 tracked Minnesota redemption windows, 33.4% ended with the owner redeeming — and where the winning bid was under half the assessed value, 58.1% did.

That has a direct financing consequence. A hard money loan on a certificate you may not convert into a property, in a state where the redemption window is six months and 51.0% of windows are still unresolved at eighteen months, is an expensive way to hold a position. Lenders know this, which is why auction lending in redemption states is priced differently and sometimes refused outright.

Where flip financing fails#

The lender's ARV comes in low. The most common failure. You budgeted on your number; the loan is sized on theirs. The shortfall is cash you have to find between approval and closing.

Renovation overruns and the loan is fully drawn. Once the committed renovation amount is exhausted the lender is not obliged to add to it. Overruns come from your pocket, and a 20% overrun on a $58,000 budget is $11,600.

The project runs past the term. Extension fees, or a scramble to refinance into something more expensive.

A draw is refused. Work not completed to the inspector's satisfaction, scope changed without approval, or permits not pulled. Funds stop until it is resolved and the interest keeps running.

The exit market moves. An eight-month project started when comparable properties sold in three weeks and finishing when they sit for ninety days is a different deal. This is why days-on-market belongs in the underwriting alongside price.

Choosing a lender, and the questions that separate them#

Hard money lenders are not interchangeable, and the differences that matter are not the ones on the front page.

Are they lending their own capital or brokering it? A direct lender decides. A broker submits your file to someone who decides, which adds days and a layer of fee. Ask plainly.

How fast do they actually close, on a file like yours? Every lender advertises ten days. Ask for the last three deals of your type and what they took. Speed is the entire reason to pay these rates, and a slow hard money lender is the worst of both worlds.

Do they lend in your state, and do they understand it? A national lender that has never funded in a redemption state may not know that a sheriff's certificate is not a deed. That surfaces at closing, when title cannot be insured the way their template expects.

What is their draw turnaround, measured not promised? Four days versus ten across five draws is a month of interest on completed work.

What happens if you need an extension? Ask the fee and whether it is automatic or discretionary. A lender who can refuse an extension on a project at 80% completion has considerable leverage over you at exactly the wrong moment.

Do they require a personal guarantee? Most do. Understand what you are signing — a guarantee means the loan is not really non-recourse regardless of how the property is titled.

What do they do if you default? Every lender will say it does not come up. Ask anyway, because the answer tells you how the relationship is structured.

The refinance exit, if the flip does not sell#

Not every flip sells. Sometimes the market moves, sometimes the finished product is wrong for the area, and sometimes it simply sits.

The standard fallback is refinancing into a rental loan and holding the property as a rental until conditions change. That is the BRRRR structure arrived at involuntarily, and it works only if three things line up.

The property must appraise. A rental refinance is sized on value, and if the reason it did not sell is that your ARV was optimistic, the refinance will be short too.

It must rent for enough. DSCR lenders size on the rent against the payment. A property that does not cover debt service at the refinanced amount does not qualify.

You must survive the seasoning requirement. Many lenders require the property to be held for a period, commonly six to twelve months, before refinancing at appraised value rather than at purchase price. A hard money loan maturing at month eight against a seasoning requirement of twelve months is a gap you have to bridge.

Establish the refinance exit before you buy, not when you need it. A lender who will refinance you is a phone call in week one and a crisis in month nine.

What it means for what you can offer#

Financing feeds straight back into the maximum offer.

The 70% rule — ARV × 0.70 − repairs — holds back 30% for holding costs, closing costs on both ends, selling costs and profit. Financing costs live inside that 30%, and on an expensive loan over a long project they consume more of it than most people budget.

On the worked example: $325,000 ARV, $58,000 repairs, maximum offer $169,500. If financing costs $18,000 across points, interest and fees over eight months, that is a substantial share of the buffer before a single thing goes wrong.

Cheaper money means you can pay more and still profit — which is why experienced flippers with a line of credit or private capital consistently outbid newer buyers on hard money. It is not that they are braver. Their cost of capital is lower.

Before you borrow#

1. Get the lender's ARV before you commit, not after.
2. Ask whether interest accrues on the drawn balance or the full commitment.
3. Ask for the full fee schedule in writing — points, doc, valuation, per-draw inspection, extension.
4. Take a longer term than you think you need. Extension fees cost more than the extra months.
5. Confirm the draw schedule and inspection turnaround before you plan the build.
6. Hold working capital beyond the down payment. You pay for each stage before the draw reimburses you.
7. Price financing into the 70%, and recalculate the maximum offer with the real number.
8. In a redemption state, ask whether the lender will lend on a certificate at all — and what happens to your loan if the owner redeems.