The gap between what a distressed property sells for and what it's worth after renovation is where real estate investors make their money. But bridging that gap requires capital — and lots of it, fast. Fix and flip financing exists specifically for this use case: short-term, asset-based loans that fund both the purchase and the renovation of properties that traditional mortgage lenders won't touch. Understanding how these loans are structured, what they cost, and how lenders evaluate risk is the foundation of profitable real estate investing.
How Fix and Flip Loans Work
Fix and flip loans — also called hard money loans or bridge loans in this context — are short-term, asset-based loans secured by the investment property being purchased. Unlike conventional mortgages, which are underwritten primarily on the borrower's income and credit, fix and flip lenders focus primarily on the value of the property and the strength of the deal. This asset-first underwriting model is what allows approval and closing in days rather than months.
The loan structure has two components that work together:
- Purchase portion: Funds the acquisition of the property — typically 80%–90% of the purchase price, depending on the deal and the borrower's experience level.
- Renovation portion (rehab holdback): Funds the cost of improvements — usually 100% of the renovation budget — but released in draws as work is completed rather than as a lump sum at closing. This protects the lender from funding work that doesn't happen and protects the borrower from over-advancing.
During the renovation period, most fix and flip loans are interest-only — you pay only on the portion of the loan that has been drawn, not on the full committed amount. This minimizes your carrying cost while work is underway. When the property sells, the loan is repaid in full from the proceeds. The entire cycle — purchase, renovation, sale — is designed to happen within 12 months.
The ARV Formula: How Lenders Size the Loan
The most important number in any fix and flip deal is the After Repair Value (ARV) — the estimated market value of the property after all planned renovations are complete. Lenders use the ARV, not the current purchase price, as the primary basis for determining how much they'll lend.
The standard formula:
- Maximum loan = 65%–70% of ARV
- Example: ARV of $400,000 × 70% = $280,000 maximum loan
- If purchase price is $180,000 and renovation budget is $80,000, total project cost is $260,000 — well within the $280,000 maximum
- The $20,000 cushion represents margin between total project cost and max loan, plus your equity contribution
The 70% Rule for Investors: Before even approaching a lender, experienced flippers use the 70% rule as a quick deal screen: Maximum Offer Price = (ARV × 70%) − Estimated Repair Costs. On a $400,000 ARV property with $80,000 in repairs: ($400,000 × 70%) − $80,000 = $200,000 maximum offer. Deals that only work above that threshold leave insufficient margin for holding costs, selling costs, and unexpected repairs — the three expenses that most often destroy flip profitability.
How the Renovation Draw Process Works
The renovation portion of the loan is held back and released in draws as work progresses. Understanding this process before you start is essential — cash flow during renovation depends on it.
Submit a Detailed Scope of Work and Budget
Before closing, you'll submit a line-item renovation budget — often called a Scope of Work (SOW) — breaking down every planned repair and improvement with associated costs. The lender reviews this against comparable projects, your contractor's quotes, and local labor rates. Some lenders require licensed contractor bids; others accept detailed owner-prepared estimates for experienced investors. The approved budget becomes the basis for the rehab holdback amount.
Complete Work in Phases, Then Request a Draw
Renovation draws are requested after work is completed — not before. You complete a phase of work (e.g., demo, framing, rough electrical), then submit a draw request documenting what's been done. Most lenders allow 3 to 5 draws over the course of the project; some offer more for complex renovations. Draw requests are typically accompanied by photos, contractor invoices, and lien waivers from contractors who've been paid.
Lender Inspects and Releases Funds
After receiving a draw request, the lender sends an inspector (or reviews photos/documentation for smaller draws) to verify that the requested work has been completed satisfactorily. Once approved, the draw funds are released — typically within 2 to 5 business days. For first-time borrowers with that lender, this process may be slower; established borrowers often receive expedited draw processing.
Draw Delays Are a Real Cash Flow Risk: The most common operational challenge in fix and flip projects is cash flow during renovation. Because draws are released after work is completed, you (or your contractor) must front the labor and materials costs for each phase and wait for reimbursement. If draw approvals are slow — 5–10 business days per draw — and you have multiple concurrent phases or a long renovation, the working capital gap can become significant. Before closing, ask your lender specifically about their average draw processing time and whether they offer advance draws for experienced investors.
What Fix and Flip Lenders Evaluate
Fix and flip underwriting is faster than conventional mortgage underwriting, but it's not unsophisticated. Lenders evaluate the deal on multiple dimensions:
| Factor | What Lenders Look For | Why It Matters |
|---|---|---|
| ARV & Deal Margin | LTV ≤ 70% of ARV; strong comparable sales supporting ARV | Primary protection against loss if borrower defaults |
| Purchase Price vs. Market | Property purchased below market/distressed value | Confirms equity cushion and realistic profit potential |
| Renovation Budget | Realistic, detailed scope with contractor bids | Cost overruns are the #1 reason flips fail — lenders vet this carefully |
| Investor Experience | Track record of completed flips; references | Experienced investors have lower default rates — better terms reflect this |
| Exit Strategy | Clear plan to sell (or refinance to rental if sale falls through) | Lenders want confidence the loan will be repaid before maturity |
| Personal Credit | Minimum 600+; better rates with 680+ | Secondary consideration, but affects rate and terms significantly |
Understanding Fix and Flip Loan Costs
Fix and flip loans are meaningfully more expensive than conventional financing — and deliberately so. They're short-term, fast-closing, asset-based products that carry more lender risk. The costs must be modeled into your profit calculation before you commit to a deal.
- Interest rate: 7%–13% annually, charged as interest-only on drawn amounts. At 10% annualized on a $200,000 draw for 9 months, interest cost = ~$15,000.
- Origination points: 1–3 points (1%–3% of loan amount) paid at closing. On a $250,000 loan at 2 points = $5,000 upfront.
- Extension fees: If the project takes longer than planned and you need to extend the loan term, expect to pay 0.5%–1.5% per extension period. Extensions can add up quickly on a project that runs over schedule.
- Draw fees: Some lenders charge $150–$500 per draw inspection. On 5 draws at $300 each = $1,500.
- Appraisal / BPO: $400–$600 for the ARV appraisal or broker price opinion required at origination.
Model All Holding Costs, Not Just Loan Interest: Loan interest is the most visible cost, but the full picture of holding costs also includes property taxes (prorated for the hold period), insurance, utilities, HOA fees (if applicable), and any carrying costs during the listing period after renovation. A 9-month flip project with a 3-month listing period means 12 months of holding costs. Experienced flippers budget 6%–8% of the total project cost for holding costs, regardless of how short they expect the hold to be.
First-Time Flippers: What to Expect
Lenders treat first-time fix and flip borrowers differently than experienced investors — with higher rates, lower LTV limits, and stricter documentation requirements. This is not a barrier, but it is something to plan for.
- Lower LTV on first deal: First-time flippers may be capped at 65% LTV rather than 70%, requiring more equity in the deal.
- Licensed contractor required: Many lenders require that first-time borrowers use a licensed general contractor rather than managing the project themselves (owner-as-GC).
- More documentation: Expect requests for a detailed business plan, personal financial statement, and a comprehensive scope of work with contractor bids.
- Higher rate or points: First-deal rates may run 1–2 percentage points higher than rates offered to investors with 5+ completed flips. This typically normalizes by the second or third project with the same lender.
Ready to Fund Your Next Flip?
We work with fix and flip lenders who close in as few as 5–7 business days. Whether this is your first project or your fiftieth, we'll match you with lenders who offer the right LTV, rate, and draw structure for your deal.
Talk to a Fix & Flip Financing SpecialistSources & Further Reading
- Federal Reserve — H.15 Selected Interest Rates (Hard Money Rate Benchmarks)
- CFPB — Mortgage and Real Estate Financing Resources
- FDIC — Statistics on Depository Institutions (Banking & Lending Market Data)
- Federal Reserve Banks — Small Business Credit Survey: Report on Employer Firms
- IRS Publication 523 — Selling Your Home (Tax Implications of Property Sales)
External sources are provided for informational purposes. Business Loan Brokers is not affiliated with and does not endorse any government agency or third-party organization linked above.
