Fix and Flip Loan Terms Explained in Plain English

Start with the three value numbers

Three abbreviations do most of the work in a flip loan quote. ARV is the after-repair value, meaning what the property should be worth when the work is finished. LTV is loan to value, the loan amount as a percentage of a value. LTC is loan to cost, the loan amount as a percentage of what the project costs, usually the purchase price plus the rehab budget.

The confusing part is that LTV can be measured against either the current value or the after-repair value, and lenders use both. Many flip programs describe an ARV limit, such as a maximum loan equal to a share of the after-repair value, alongside a loan to cost limit. The loan is generally capped by whichever limit is lower. Always ask which value the lender is using, because the same loan can look generous or tight depending on the base.

Every number below is a generic illustration. Typical ranges for these programs vary widely by lender, borrower experience, property type and market, and nothing here is a quote or a promise of terms.

A worked example from purchase to payoff

Take a property under contract at $200,000 with a rehab budget of $60,000 and an expected ARV of $330,000. Total project cost is $260,000. Suppose a lender offers up to 85 percent of the purchase price and 100 percent of the rehab, but also caps the total loan at 70 percent of ARV. Eighty-five percent of the purchase is $170,000. Add $60,000 of rehab and you get $230,000. Seventy percent of the ARV is $231,000. The $230,000 request sits just under the ARV cap, so it works.

Now check the loan to cost. $230,000 divided by $260,000 is about 88 percent. You are putting in roughly $30,000 toward the purchase, plus points, closing costs and carrying costs. If the lender cap was 65 percent of ARV instead, the maximum loan would be $214,500, and you would need to find another $15,500 of cash. One policy change, and the deal needs more of your money.

This is why you should never plan around the headline leverage number. Plan around the number you get after every cap is applied, and keep a cushion in case the appraisal comes in lower than your estimate.

Points, interest and what you actually pay

Points are a fee charged at closing, with one point equal to one percent of the loan amount. On the $230,000 loan above, two points is $4,600. Lenders may also charge other fees for processing, underwriting, document preparation, draw inspections and wires. Ask for a full list of fees in writing, and look at the total cost, not just the rate.

Most flip loans are interest-only, which means you pay interest each month and the principal comes due at payoff. At 11 percent on the full $230,000, interest would be $25,300 a year, or about $2,108 a month. Because rehab funds are released in stages, you will often owe interest only on the money that has actually been advanced, so your early payments are lower and rise as draws are funded. The rate a lender quotes is typically in the high single digits to low double digits for these programs, but that range moves with the market and your file.

Add it up for a nine-month project. Points of $4,600, closing costs of perhaps $4,000, and interest averaging maybe $1,800 a month, or $16,200, bring the cost of money to about $24,800. Then add taxes, insurance, utilities and selling costs. Flippers who forget the cost of carrying a project are the ones who find out their margin was thinner than they thought.

Draws: how rehab money actually reaches you

On many flip loans, the rehab portion is held back at closing and released in draws as work is completed. You complete a phase, request a draw, the lender or an inspector verifies progress, and funds are released, often by reimbursing you or paying the contractor directly. Some lenders fund a first draw at closing or soon after.

The practical consequence is that you must be able to float the work between draws. If your contractor needs a deposit and you are waiting on an inspection, your own cash has to bridge the gap. This is one of the biggest reasons lenders look at liquidity beyond the down payment. Plan to front money for each phase and expect it to be reimbursed on a schedule that can take days.

Keep draw requests clean. Send photos, invoices and a short note on what was done. Ask in advance how many draws are allowed, whether there is a fee for each draw, and how long a typical turnaround takes. A lender with a slow draw process can ruin a tight timeline even when the rate looks good.

• Ask how many draws are allowed and whether each carries a fee
• Ask how progress is verified: photos, inspector visit or both
• Ask whether funds go to you or to the contractor
• Ask for the typical time from request to funding

Terms, extensions and prepayment

Flip loans are short. Terms in the range of six to eighteen months are common, though they vary by lender and program. Your plan should have a built-in cushion. If the project should take five months, a twelve-month term gives you room for permit delays, a slow market, or a buyer whose financing falls through. If a term is shorter than your realistic schedule, that is a problem to solve before closing, not after.

Extensions exist because projects slip. A lender may allow you to extend for a fee, often expressed as a percentage of the loan or a flat amount, and may require the project to be in good standing. Read the extension terms before closing. The right to extend should be written down, with the cost and conditions spelled out.

Also check prepayment terms. Some loans carry a minimum interest period, which means you owe a certain number of months of interest even if you pay off early. If you expect a quick sale, that clause affects your math. Have a licensed attorney read the loan documents, since details like default rates, cross-collateralization and guarantor obligations carry real consequences.

Reading a quote side by side

When you hold two quotes, put them in the same table. Write down the loan amount after all caps, the rate, the points, other fees, the term, the extension cost, the draw process and the cash you must bring to closing. A lower rate with higher fees and a smaller loan can cost more in real dollars than a higher rate with a bigger loan, and cash you tie up has its own cost.

Be especially careful with how the rate applies. Interest charged on the full commitment from day one costs more than interest charged only on funded balances. A quote that sounds cheaper may simply be using a different calculation method. Ask the broker or lender to show you a sample payment schedule.

The goal of all this is not to find the cheapest loan on paper. It is to find the loan whose terms match how your project will actually run, so there are no surprises when the work starts and the clock is ticking.