Fix and Flip Loans: Funding Purchase, Rehab and Resale

A fix-and-flip loan is short-term financing that helps an investor buy a home that needs work, pay for the renovation and repay the loan when the finished property sells. Lenders size these loans around the project, looking at the purchase price, the rehab budget and the home's expected value after repairs. Renovation money is usually released in draws as work is completed.

How a fix-and-flip loan funds a project

Think of a flip loan as two buckets of money. The first covers part of the purchase price at closing. The second is a renovation budget that the lender holds and pays out as the work progresses.

You bring cash for the rest of the purchase, closing costs and anything the loan does not fund. During the project you usually make interest-only payments, and with some loans interest is charged only on the renovation money that has actually been released.

When the home is finished, you list it and sell it, and the sale proceeds pay off the loan. The term is short, measured in months rather than years, so the lender expects the project to move steadily from purchase to resale.

A flip is a business venture, so flip loans are generally business-purpose loans, and many investors buy through an LLC formed for the project. That puts the loan under a different set of rules and disclosures than a mortgage on the home you occupy; ask your loan officer to name the ones that apply. For entity and tax questions, talk to a tax professional or attorney.

Flippers this financing tends to suit

Fix-and-flip loans suit investors who have found a property with a clear renovation opportunity and know how to manage a project. That includes:

Seasoned flippers who want to preserve cash for more than one project at a time
Less experienced flippers working with a seasoned contractor or partner
Investors buying homes in poor condition that standard lenders will not finance
Builders and contractors who renovate and sell homes as part of their business

Lenders also care about how you will manage the job day to day. If you live far from the property, expect questions about who will oversee the contractor and check progress between draws.

They are a weaker fit for buyers without cash for overruns, without reliable contractors or without a realistic sense of local resale values.

The project file a flip lender wants to see

Flip lenders underwrite the project as closely as the borrower. A complete file usually includes:

The purchase contract and photos of the property
A line-item scope of work and renovation budget
Contractor bids or estimates for major work
Comparable sales that support the after-repair value
A schedule covering renovation, listing and sale
Statements proving cash for closing plus a cushion
A record of past projects, if you have one
Entity documents and builder's risk or vacant property insurance

Expect the lender to order its own valuation as well, often an appraisal that estimates both the as-is value and the after-repair value. That after-repair estimate is the figure that shapes the size of the loan.

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Flip financing versus a purchase-only short-term loan

Some short-term loans fund only the purchase and leave you to pay for the renovation in cash. A fix-and-flip loan adds the renovation budget, with draws and inspections built in.

A purchase-only loan can be simpler and may suit light cosmetic projects or investors with plenty of cash. A flip loan suits heavier renovations, since it spreads the cost of the work across the loan and keeps more of your cash available. The trade-off is more paperwork, inspection fees and closer oversight from the lender as the project moves forward.

If you plan to keep the home as a rental rather than sell it, a renovation loan followed by a DSCR refinance may be the path to discuss with a loan officer instead.

Upsides and pressure points of flip financing

On the plus side, a flip loan can:

Fund homes in a condition that standard loans will not cover
Include renovation money alongside the purchase
Let you keep more of your own cash in reserve
Often close faster than a bank loan, which helps when you are competing for a property

The pressure points:

Higher cost than long-term financing, including points and lender fees
Holding costs that grow with every delay
Draws that may lag behind your contractor's schedule
Resale risk if the market softens before you sell
A maturity date that does not move just because the project did

No financing can make a flip profitable on its own. The deal has to work on realistic numbers, and you should treat every estimate as a range rather than a promise.

Run the numbers twice: once with your expected costs and sale price, and once with a longer schedule, a bigger budget and a lower sale price. If the second version leaves you unable to carry the loan, rethink the deal or the financing before you commit.

Getting a flip deal ready to submit

Before you call a lender, put the project on paper. Write the scope of work, gather contractor bids, pull comparable sales for finished homes nearby and sketch a schedule from closing through resale.

Confirm permit requirements with the local building department, and make sure you have cash for the down payment, closing costs, the first phase of work and a contingency.

Then talk with a licensed loan officer about how the lenders they work with handle draws, after-repair value and extensions. Each flip is reviewed on its own merits, and financing for it is subject to credit approval.

Try it: Hard Money Loan Calculator (estimate only).

Who this tends to fit

Investors with a renovation project and a clear resale plan
Experienced flippers running more than one project at once
Less experienced flippers teamed with a seasoned contractor or partner
Buyers of homes that standard lenders decline because of condition
Contractors who renovate and sell homes as a business
Investors who want to keep cash available for overruns

Before you call

A room-by-room or system-by-system renovation budget
Contractor estimates for structural, mechanical and roofing work
Comparable sales for renovated homes near the property
A calendar from closing through listing and sale
Cash for closing, the first phase of work and a contingency
Notes on permits the local building department will require

Fix and Flip Loans by state

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Common questions

What is a fix-and-flip loan?

A fix-and-flip loan is a short-term loan for buying a home that needs work, renovating it and selling it. It usually covers part of the purchase and part of the renovation, with repair funds released in draws after inspections. The loan is repaid from the sale. These are typically business-purpose loans with higher costs than long-term financing.

How do lenders decide how much to lend on a flip?

Lenders look at the purchase price, the renovation budget and the estimated value of the home after repairs, then apply their own guidelines. Your experience, credit and cash also matter. Because each lender sets its own limits and they change, ask the loan officer how the lenders they work with would size your specific project.

Are draws paid before or after the work?

Most lenders pay draws after the work is done and inspected, which means you or your contractor front the cost of each phase. Some lenders allow an initial advance for materials or the first phase. Ask how the draw process works, including inspection fees and turnaround, before you sign so you can plan your cash.

What are holding costs on a flip?

Holding costs are what you pay to own the property while it is being renovated and sold. They include loan interest, insurance, property taxes, utilities and any association dues. They rise with every delay, so a realistic schedule and a cushion for extra time are important parts of planning any flip.

How much of my own cash will a flip require?

It depends on the lender, the property and your experience. You typically bring cash for part of the purchase, closing costs and anything the loan does not fund, plus reserves for overruns and holding costs. First-time flippers may be asked to bring more. A loan officer can estimate your cash needs once they see the deal.

Do flip lenders check the contractor?

Many do. Lenders may ask for the contractor's license, insurance and bids, and some review the contractor's track record. They want confidence that the work will be completed on budget and to code. If you plan to do work yourself, expect questions about your experience and how you will meet inspection and permit requirements.

Fix and Flip Loans for House Flippers