Craig PornoreyA house with a leaking roof, outdated wiring, and an old kitchen is hard to finance with a standard mortgage. The bank has to lend against the property in its current condition. If the home fails appraisal standards or basic habitability rules, a strong borrower’s financial profile usually does not fix the problem.
That gap is why fix-and-flip loans exist. Private lenders use short-term asset-based financing to fund the purchase of a distressed home and the repairs needed to resell it. If an investor considers a flip project, the loan works very differently from a standard mortgage. Let’s look at how it works.
What a Fix and Flip Loan Pays For
Most fix and flip loans have two parts. The first is an initial advance toward the purchase price, often between 75% and 90% of what you pay. The second is a repair budget that the lender holds back and releases in stages. They are called draws. An inspector confirms the work before each draw, so the money often arrives after a contractor has already started a phase.
Lenders also cap the total loan at a share of the after-repair value, or ARV, which is the price the finished house should sell for. The ARV is determined by a licensed appraiser. When the limit based on cost and the limit based on value are different, the lower number sets the loan amount.
Repayment moves on a short timeline. The borrower makes monthly interest-only payments, and the full loan balance comes due at the end of the term, usually after 12 months.
The loan is paid off when the property sells or when the investor refinances into long-term financing.
What a First-Time Flipper Needs to Bring
Lenders rarely fund the whole purchase, so the first requirement is a down payment. On a $165,000 house with an 80% advance, that comes to $33,000 before any fees.
Next comes cash for the months the house sits unsold. Interest, insurance, utilities, and property taxes keep running whether or not a buyer shows up, and six months of those costs makes a sensible reserve. A repair buffer of 5% to 10% belongs on top of that, because estimates tend to move once the walls are open.
Credit still matters, but the lender is mainly trying to answer one question: does this property support the loan?
A higher credit score can allow the lender to advance more of the purchase price. First-time borrowers may also face tighter limits, such as a higher FICO score for a larger advance or a cap on the repair budget compared with the purchase price.
Ask about those limits before comparing rates. They can rule out a project that looked affordable on the surface.
Choosing a Project for a First Flip
Cosmetic work is the safest place to start: paint, flooring, kitchens, bathrooms, and fixtures. Structural repairs, foundation problems, and anything that needs permits add cost and delay that are hard to predict. An inspection before the offer is worth the fee, since it costs far less than a hidden roof or foundation problem found after closing.
Many investors then apply the 70% rule to set a ceiling on the offer. Multiply the ARV by 0.70, then subtract the repair cost. Base the ARV on recent sales of similar renovated homes nearby rather than on listing prices, because asking prices tend to run higher than what buyers actually pay.
What the Numbers Look Like on a Real Deal
Take a house that should sell for $300,000 after $45,000 of repairs. The 70% rule gives a maximum offer of $165,000 ($210,000 minus $45,000). An 80% advance of $132,000 plus the full $45,000 repair budget makes a $177,000 loan, and the investor brings $33,000. That loan equals 59% of the ARV, which sits well inside the limits lenders set on finished value.
Here is what a six-month project could cost, using illustrative figures:
| Cost | Amount |
| Origination fee (2%) | $3,540 |
| Underwriting fee | $1,500 |
| Title and insurance | $4,500 |
| Draw inspection fees (5 draws) | $1,250 |
| Interest, 6 months at 10.99% | $9,726 |
| Holding costs (taxes, utilities) | $3,000 |
| Selling costs (6% of sale price) | $18,000 |
| Total | $41,516 |
The interest line applies the rate to the full $177,000 for all six months. Some loans charge interest only on money already released, so the real cost can come in lower.
Subtract the $165,000 purchase, the $45,000 of repairs, and those $41,516 in costs from a $300,000 sale, and about $48,500 remains. The investor’s own cash over the six months comes to roughly $56,500, which covers the down payment plus fees, interest, and holding costs, so the return works out to about 86%.
Now suppose the repairs run 10% over budget, which adds $4,500. The house also takes three extra months to sell, which adds about $4,900 in interest and $1,500 in holding costs. Profit drops to roughly $37,600. The deal survives that, but it’s important to run the model and sensitivity analysis before committing capital.
What Happens When the Timeline Slips
Timing is important and should be evaluated in advance.
Picture this: a contractor runs late, a permit takes longer than expected, or the resale market slows down.
A flip only works if the project stays close to the original timeline. Once it runs long, interest keeps accruing every month, which is why the stress case above can change the profit.
Before signing, ask the lender what happens at the loan due date. Confirm whether an extension is available, how long it lasts, and what it costs.
The other exit is refinancing into a long-term rental loan. That is why a house that can also rent well gives a first-time flipper a second way out.
How to Choose a Fix and Flip Lender
Rates matter, but the questions below usually reveal more about how a loan will behave once the project starts:
- How quickly can you get a term sheet, and how long does closing take?
- Which fees apply in total, and are they all in writing?
- How are draws requested, and how fast does money arrive after the inspection?
- What terms apply to first-time borrowers?
- What happens when the loan matures before the house sells?
As an example, Ridge Street Capital is a private lender that finances fix-and-flip loans on single-family homes and condos in 36 states.
Its beginner program can advance up to 90% of the purchase price for borrowers with a 740 credit score or higher. Interest in that program runs from 10.75% to 11.5%, with origination fees starting at 2.0%.
That means investors with no flipping experience can still qualify for financing if their credit, cash to close, and deal numbers meet the program requirements.
Before You Make an Offer
Run the deal twice: once with the numbers you expect, and once with repairs 10% over and three extra months of interest. If the profit holds in the second version, the loan structure can carry the project. If it disappears, the house is the wrong one for a first flip, no matter how good the photos look.
