Fix-and-Flip Loan

A fix-and-flip loan is short-term financing for an investor who plans to buy a property, renovate it and resell it. Terms are short, often a year or so, and payments are usually interest-only. The loan typically has two parts: an advance toward the purchase price at closing, and a rehab holdback that covers the renovation budget and is paid out later in draws.

Lenders size these loans against more than one limit. A common setup caps the loan at a share of total project cost, called loan-to-cost (LTC), and also at a share of the after-repair value (ARV). The lower limit wins. Here is an example with round, hypothetical numbers: purchase price $200,000, rehab budget $50,000, ARV $350,000. At 90 percent LTC, the cap is $225,000. At 70 percent of ARV, the cap is $245,000. So the loan is $225,000: $175,000 at closing and a $50,000 rehab holdback. The investor brings $25,000 plus closing costs.

The exit strategy is usually a sale. Some investors instead rent the finished property and refinance into a long-term rental loan.

Why it matters for lenders

Fix-and-flip lending is fast, repeat business, often with the same investors several times a year. The risk is in the plan. If the budget is too thin, the investor runs out of money halfway through. If the ARV is too hopeful, the sale won't cover the loan. Many lenders weigh an investor's track record heavily and lend less to newer borrowers.

The rehab holdback is the lender's main control. Paying draws only for work that is actually done keeps the loan balance in line with the property's value. Paying ahead of the work, often called front-loading, leaves the lender exposed if the borrower walks away.

How it works in practice

An investor closes on a house and starts work. Three weeks later, she submits a construction draw request for demolition and new windows. The lender's draw coordinator checks the request against the approved budget line by line, orders an inspection, and reviews the photos. The inspector confirms demolition is done but only half the windows are in. The coordinator approves the demolition line in full and half of the window line. The approved amount is wired, and interest starts on the new balance.

A lender with 200 active flips may handle dozens of draws a week. When budgets, inspection photos and draw history sit in spreadsheets and email, staff struggle to see what is left in each line, which projects are behind, and which maturities are coming up. Tying draws to the budget and the loan record keeps funding quick and controlled.