Fix and flip financing is one of the most transaction-specific products in commercial lending. Unlike conventional loans that underwrite the borrower's income and credit, fix and flip lenders underwrite the deal — the property, the scope of work, the after-repair value, and the exit.
Getting the financing right on a flip is as important as getting the acquisition price right. An improperly structured loan creates draw friction, timeline pressure, and unnecessary cost that erodes the margin before the project is halfway done.
How Fix and Flip Loans Are Structured
Fix and flip loans are short-term bridge loans, typically structured with:
- Loan-to-cost (LTC) up to 92% — covering a substantial portion of purchase price plus renovation budget
- Loan-to-ARV up to 70% — the ceiling based on the property's projected value after renovation
- Term: 6 — 36 months, with interest-only payments during the renovation period
- Draw schedule: Renovation funds disbursed in tranches as work is completed and inspected
The lender's primary security is the property's after-repair value. The underwriting question is: if this project is completed as planned, does the ARV support the total loan amount?
The Two Key Metrics: LTC and ARV
Loan-to-Cost (LTC) measures the loan amount against total project cost — purchase price plus renovation budget. A 92% LTC on a $400,000 total project means the lender advances $368,000 and the investor contributes $32,000.
Loan-to-ARV measures the loan amount against the projected value of the finished property. If the ARV is $550,000, a 70% ARV ceiling means the maximum loan is $385,000 — regardless of what the LTC calculation allows.
The binding constraint is whichever metric produces the lower number. Investors who misunderstand this are sometimes surprised to find their LTC advances cut by the ARV ceiling on a project in a market with compressed values.
What Lenders Evaluate
Fix and flip underwriting is asset-centric but investor-aware:
Property fundamentals
- Purchase price relative to comparable sales (comps)
- Renovation scope — detailed contractor estimate or scope of work
- ARV supported by comparable sold properties within the last 90 days
- Property type — single-family and small multifamily are most broadly financeable
Investor profile
- Track record — lenders want to see prior completed projects; first-time investors face tighter terms or lower advance rates
- Liquidity — cash reserves to cover interest payments and cost overruns
- Contractor relationships — a defined renovation team reduces execution risk in lender eyes
Market
- Comps must support the ARV in the current market, not a projected market 18 months out
- Properties in thin markets with few comparable sales face more scrutiny
The Draw Process: Where Projects Stall
The draw process is frequently where fix and flip financing breaks down — not the initial approval.
Renovation funds are held in reserve and released in stages. After each phase is complete, the borrower submits a draw request. The lender sends an inspector to verify completion. Funds are released — typically within 3–7 business days of inspection approval.
Projects stall when:
- Contractor work is inconsistent with the approved scope, requiring rework before draw approval
- Draw requests are submitted without adequate documentation
- Cost overruns exceed the renovation reserve and the investor has insufficient liquidity to bridge the gap
- Inspection disputes require resolution before funds release
Understanding the draw mechanics before closing — not after — is part of professional deal execution.
Renovation Budget Discipline
The renovation budget submitted at closing is the lender's basis for the renovation reserve. Cost overruns are not automatically funded. Most lenders will work with a borrower to address overruns, but it typically requires a formal modification and may trigger a re-inspection or reappraisal.
Experienced investors build a 10–15% contingency into the renovation budget at the outset. This is not padding — it is standard underwriting practice and demonstrates sophistication to lenders.
Exit Strategy
Fix and flip lenders are short-term partners. Their primary concern is your exit. A clearly articulated exit — sale at a supported price, refinance into a DSCR rental loan if the market shifts — is part of a credible loan request.
If your exit is "sell the property," your comps need to support the sale price at the expected margin. If your exit is "hold as a rental," the DSCR on the stabilized property must support a refinance.
Explore fix and flip loan programs or start a pre-qualification review to discuss your next project.
Starting Gate Financial is a commercial financing firm based in Richardson, TX. We do not quote rates or guarantee approvals. All financing decisions are subject to lender underwriting criteria.