Fix and flip loans: how lenders evaluate rehab budgets and ARV

A fix and flip loan is a short-term, business-purpose loan to buy a property, renovate it and sell it. Lenders underwrite it on three numbers: the purchase price, the rehab budget and the after-repair value (ARV), plus the borrower's ability to execute the plan. Get the budget or the ARV wrong, and the loan can end up larger than the finished property is worth.

This guide explains how lenders evaluate each part, how the loan is sized and structured, and what capital partners should check.

How a fix and flip loan is structured

Most fix and flip loans have two parts:

• The initial advance at closing, covering part of the purchase price.
• The rehab holdback, covering some or all of the renovation budget, released in draws as work is completed. See construction draw management.

Interest is usually charged only on the amount drawn, and the loan is repaid when the property sells.

Evaluating the rehab budget

A good budget is detailed, realistic and matched to the scope of work.

What lenders look for

• Line items, not a single number: demolition, structural, roof, mechanicals (plumbing, electrical, HVAC), windows, kitchen, bathrooms, flooring, paint, landscaping, permits.
• Scope that matches the property: a 60-year-old house with original systems needs more than cosmetic work.
• Costs that fit the market: compared against the lender's experience with similar projects, contractor bids or a third-party cost review.
• A contingency: a reserve for surprises, which renovations almost always have.
• Permits: which work requires them, and whether timing allows for approvals.
• Who's doing the work: the borrower's contractor and their track record.

Red flags

• One-line budgets or round numbers with no detail.
• Costs well below what similar projects have needed.
• No contingency.
• Structural or mechanical work missing from an older property's budget.
• A scope that doesn't match the ARV (a cosmetic budget with a luxury-renovation ARV).

Evaluating the ARV

The after-repair value is the appraiser's estimate of what the property will be worth after the planned renovation. See how to read an appraisal.

• Comparable sales of renovated properties nearby, recently sold, and similar in size and quality.
• Matched to the budget: the appraiser should have the scope of work, and the comps should reflect that level of finish.
• Realistic spread: the jump from as-is value to ARV should make sense for the work being done.
• Market speed: how quickly renovated homes sell in that area.

Sizing the loan

Lenders typically cap the loan using several limits at once, and the loan is the lowest result:

• A maximum share of the purchase price for the initial advance.
• A maximum share of the rehab budget for the holdback.
• A maximum loan-to-cost (LTC) on total project cost.
• A maximum loan-to-ARV.

See LTV vs. LTC vs. ARV for how each ratio works.

A worked example

Hypothetical figures and limits, for illustration only.

Item	Amount
Purchase price	$250,000
Rehab budget (including 10% contingency)	$88,000
Total project cost	$338,000
ARV	$460,000

Suppose the lender's program limits are 90% of purchase, 100% of rehab, 90% LTC and 70% loan-to-ARV.

Limit	Calculation	Maximum loan
Purchase + rehab	($250,000 × 90%) + $88,000	$313,000
Loan-to-cost	$338,000 × 90%	$304,200
Loan-to-ARV	$460,000 × 70%	$322,000

The lowest is $304,200, so loan-to-cost is the binding limit. The borrower needs to bring the remaining $33,800 of project cost, plus closing and carrying costs.

The exit

For a flip, the exit is the sale. Lenders check:

• Time: does the term allow for the renovation plus the time it takes to sell?
• Sale costs: commissions and closing costs come out of the proceeds.
• Cushion: if the property sells below ARV, is the loan still repaid?
• Backup: could the property be rented and refinanced if it doesn't sell?

In the example, selling at the full $460,000 with roughly 7% in sale costs leaves about $428,000, comfortably above the $304,200 loan. Even a sale 15% below ARV would leave about $364,000 after costs, still enough to repay the loan. See bridge loan exit strategies.

The borrower

On a renovation, execution risk is borrower risk. Lenders look at:

• Completed flips of similar size and scope.
• Cash in the deal and reserves for overruns.
• Their team: contractor, project manager, listing agent.
• History: how past projects went, including ones that ran late or over budget.

First-time flippers can still get loans, but usually with lower leverage, more oversight or a more experienced partner.

What capital partners should check

• A line-item budget with contingency, matched to the scope.
• An ARV supported by renovated comps at the same finish level.
• Leverage within your limits on LTC and loan-to-ARV.
• Draw controls: inspections and holdbacks tied to completed work.
• Borrower experience with similar projects.
• A realistic term for the work plus the sale.

Key takeaways

• Fix and flip loans are sized on purchase price, rehab budget and ARV, with the lowest limit setting the loan.
• A strong budget is line-item, realistic and includes contingency; a strong ARV is supported by comparable renovated sales.
• Rehab money is held back and released in draws as work is verified.
• The exit is the sale; stress-test it for a lower price and a slower market.

Frequently asked questions

How much of a fix and flip project will a lender finance?

It depends on the lender's limits on purchase price, rehab budget, loan-to-cost and loan-to-ARV, and the loan is set by whichever limit is lowest. Borrowers with more experience may qualify for higher leverage.

Why do lenders hold back the rehab money?

So renovation funds are released only as work is completed and verified by inspection. This keeps the amount lent in line with the value actually built.

What is ARV in a fix and flip loan?

After-repair value: the appraiser's estimate of what the property will be worth once the planned renovation is complete, based on comparable renovated properties.

How Lender Capital fits

Fix and flip loans placed through Lender Capital include the purchase contract, line-item budget, appraisal with ARV and draw schedule, so capital partners can check the numbers before committing. Lenders get capital for projects beyond their balance sheet, and one capital partner funds the whole loan.

See how it works for lenders or for capital partners.