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Fix and Flip Loans: How They Work and What Lenders Look For

Direct Answer

Fix and flip loans are short-term hard money loans used to purchase and renovate a property for resale. The lender funds a portion of the purchase price and a portion of the rehab budget. Loan terms are typically 12 months. The lender underwrites to the after-repair value (ARV) — what the property will be worth after renovation — not just what it is worth today.

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How Fix and Flip Loans Are Structured

A fix and flip loan has two components:

Acquisition financing: The lender funds a percentage of the purchase price at closing. This is the money the borrower needs to buy the property.

Rehab holdback: The lender holds the renovation budget and releases it in draws as construction milestones are completed. The borrower does not receive this money at closing — they draw it down as work progresses.

Example:

• Purchase price: $200,000
• Rehab budget: $80,000
• Total project cost: $280,000
• Lender offers 85% LTC: $238,000 total loan
• At closing: $200,000 funds (acquisition)
• Held in reserve: $38,000 (draws as work is completed — note: lender funded 85% of rehab too)

The borrower brings the remaining 15% plus closing costs and fees to the closing table.

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What Lenders Underwrite

Fix and flip underwriting centers on two things: the deal and the borrower.

The deal:

• ARV (After-Repair Value): What will this property sell for after renovation? This is the most important number in fix and flip underwriting. The lender will order an appraisal to validate it.
• LTC (Loan-to-Cost): The total loan as a percentage of purchase price plus rehab budget. Most lenders cap this at 85-90%, with higher LTC reserved for experienced borrowers.
• LTV to ARV: Most lenders also apply a cap based on ARV — typically 70-75% of the after-repair value, whichever is the limiting factor.
• Scope of work: Is the renovation budget realistic and itemized? Does it support the ARV claim?
• Exit strategy: Is the plan to sell? At what price? How long does the market support that timeline?

The borrower:

• Experience: How many prior flips has this borrower completed? First-time flippers can get funded, but usually at lower LTC and potentially higher rates. Experienced investors (5+ deals) unlock better programs.
• Credit: Most lenders have a minimum FICO requirement. Some have no-credit programs at lower leverage.
• Financial strength: Does the borrower have liquidity to carry the loan, handle draw timing gaps, and absorb cost overruns?
• Entity: Most hard money lenders require the borrower to take title through an LLC or other entity, not in personal name.

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The ARV Problem

The most common source of disagreement on fix and flip deals is the ARV. Borrowers consistently overestimate it. Appraisers look at actual comparable sales — properties that sold in similar condition in the same area within a recent time window.

If your borrower's ARV is based on wishful thinking ("the neighborhood is improving"), the appraisal will come in lower and the loan amount will be reduced accordingly. That creates a gap the borrower has to cover at closing.

As a broker, help your borrowers run an honest ARV before you submit the deal. Pull actual comps — similar size, similar condition post-renovation, within a reasonable distance. Do not use listings as comps; use closed sales. If your ARV is aggressive, build that into your expectations.

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Dutch vs. Non-Dutch Interest on Flips

On fix and flip loans, ask every lender whether they charge Dutch or non-Dutch interest.

Non-Dutch: You pay interest only on the funds actually disbursed — the acquisition amount at first, then increasing as you draw the holdback. Better for the borrower.

Dutch: You pay interest on the entire committed loan amount from day one, including holdback funds that have not been drawn yet. More common than borrowers expect.

On a $238,000 loan with $38,000 holdback, the difference between Dutch and non-Dutch interest can be hundreds of dollars per month at the start of the project. Over a 4-month renovation phase, that adds up.

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Common Fix and Flip Loan Terms

• Interest rate: 9-13%+ (varies by lender, borrower experience, deal economics)
• Points: 1-4 points at closing
• Loan term: 12 months standard, some lenders offer extensions
• LTC: Up to 85-90% for experienced borrowers; lower for first-timers
• ARV cap: Typically 70-75% of after-repair value
• Draw schedule: Monthly or milestone-based, with inspection required before release

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What Gets Fix and Flip Deals Declined

The most common reasons fix and flip deals get declined:

• ARV is unsupported — comparable sales do not back up the projected after-repair value
• Scope of work is vague or missing — no line-item breakdown of renovation costs
• Borrower experience is below the lender's minimum for the requested leverage
• LTC exceeds program limits for the borrower's profile
• Property is in a state or market the lender does not cover
• Property type is outside the lender's program (rural, unique, unusual)
• Borrower entity not in place

Most of these are fixable. The difference between a declined deal and a funded one is often submitting to the right lender for the specific borrower profile and deal structure.

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