Fix and flip financing is short-term capital built around two numbers: what you pay for the property and what it will be worth once the work is done. Understanding how a private lender sizes those two numbers is the difference between a deal that closes and a deal that dies at underwriting.
How a fix and flip loan is structured
Most rehab loans have two parts:
- Purchase piece — funded at closing, expressed as a percentage of the purchase price or the as-is value.
- Rehab piece — held back and released in draws as the work is completed and inspected.
You do not receive the renovation money up front. You fund a stage of work, request a draw, an inspection confirms the work, and the lender reimburses. Budgeting for that timing gap is the single most common oversight among first-time flippers.
The two ratios that decide your deal
LTC (loan-to-cost) compares the loan to your total project cost, purchase plus rehab budget. ARV (after-repair value) compares the total loan to the projected finished value. Lenders generally apply both and lend against whichever comes in lower.
A $200,000 purchase with an $80,000 rehab and a $360,000 ARV gives you $280,000 in total cost. At 85% of cost, that is $238,000 in loan proceeds, which is well inside a typical ARV limit, so the cost test governs and you bring the difference.
What underwriting looks at
- The scope and budget — a line-item budget, not a single number scribbled on the contract
- The comparable sales — the ARV has to be supported by finished homes that actually sold
- Liquidity — enough cash to cover the down payment, closing costs, carry, and the first draw cycle
- Experience — prior projects help, but first-time investors are financeable with a realistic scope and a competent contractor
- The exit — sale or refinance into a longer-term loan, with a timeline that matches the loan term
Build the carry into the deal
Interest, taxes, insurance, utilities, and loan fees accrue for every month you hold the property. A four-month project that takes seven months can erase the margin entirely. Underwrite the carry at a realistic timeline, not the optimistic one, and add a contingency line of roughly 10% of the rehab budget for the surprises behind the walls.
Getting draws paid quickly
Photograph completed work, keep the budget line items matched to your requests, and submit the draw as soon as the stage is finished rather than batching several together. Draw speed is largely controlled by how organized your requests are.
Planning the exit before you close
If you are selling, price against the same comps the appraisal used and leave room for market movement. If you plan to keep the property as a rental, line up the take-out financing, often a DSCR loan, while the rehab is still in progress so the property refinances the moment it stabilizes.
What makes a strong first flip file
A conservative ARV, a contractor with a signed scope, cash reserves past the minimum, and a property in a market with real transaction volume. Those four things carry more weight than a long track record.
Ready to price a specific project? Run it through the deal analyzer or submit the deal for a real response on what the file supports.
All financing is subject to underwriting, property eligibility, and program availability. Leverage, terms, and rates vary by transaction and are not guaranteed.