Fix and Flip Loans: RTL Investment Financing

A conventional mortgage is built for a finished house and a 30-year hold. A flip is neither. The property often will not pass a standard appraisal, the renovation needs funding, and you plan to be out in nine months. That is the gap a fix and flip loan fills.

A fix and flip loan, known in the lending industry as a Residential Transition Loan (RTL) and informally as hard money, is a short-term, business-purpose loan that funds the purchase and the rehab of a 1 to 4 unit investment property. It is underwritten on the deal rather than your personal income, closes fast, and is meant to be repaid when you sell or refinance.

How the loan is sized

Fix and flip lenders use three numbers, and the loan is capped by whichever is most restrictive:

• Loan-to-cost (LTC): a percentage of purchase price plus rehab budget, commonly 80% to 90% for experienced investors
• Loan-to-purchase: a percentage of the purchase price alone, commonly 80% to 90%
• Loan-to-ARV: a percentage of the after repair value, the appraised value once the work is done, commonly 65% to 75%

Example: you buy a house for $200,000 with a $60,000 rehab budget and a $350,000 ARV. At 85% LTC the lender will fund up to $221,000. At 70% of ARV the cap is $245,000. The lower number wins, so the loan is $221,000. You bring the remaining $39,000 plus closing costs, interest reserves, and any required liquidity.

The purchase portion funds at closing. The rehab portion sits in a holdback and is released in draws as work is completed. You typically pay for a stage, request an inspection, and get reimbursed. Plan your cash flow around that lag.

Typical loan requirements

Requirements vary by lender, but most fall into these ranges:

• Property type: non-owner-occupied 1 to 4 unit residential; some lenders add small multifamily and mixed-use
• Borrower: usually an LLC or other entity, with a personal guarantee from the owners
• Experience: none required with some lenders, but 2 or more completed flips in the last 3 years unlocks higher leverage and lower rates
• Credit score: 620 to 660 minimum; 700+ for the best terms
• Down payment: 10% to 20% of purchase price, more for first-time flippers
• Liquidity: enough cash after closing to cover the first rehab draw plus 3 to 6 months of interest
• Term: 12 to 18 months, with 24 months available on larger projects and paid extensions beyond that
• Payments: interest-only, often charged only on funds drawn
• Interest rate: typically 9% to 13%, with 1 to 3 origination points
• Prepayment: usually none, though some lenders require a minimum of 3 to 6 months of interest

What underwriting actually looks at

Skipping the debt-to-income ratio does not mean skipping underwriting. Expect the lender to evaluate:

• The scope of work: a line-item rehab budget with contractor bids; vague budgets get cut
• The ARV: an appraisal or broker price opinion with comparable sales for the finished product, not the current condition
• Your track record: HUD-1s or closing statements from prior flips, plus photos
• Your credit and background: a tri-merge credit pull and a search for judgments, foreclosures, or bankruptcies
• Your liquidity: two months of bank statements showing the cash to close and carry the project
• The exit: a realistic sale timeline or a refinance plan the lender believes

Who fix and flip loans work well for

• Active flippers who need to close quickly and fund rehab without tying up all their cash
• BRRRR investors who buy, rehab, rent, then refinance into a long-term DSCR loan
• Investors buying distressed property that will not qualify for conventional or FHA financing in its current condition
• Contractors and agents moving into investing with a cost advantage on labor or deal flow
• Self-employed investors whose tax returns would never support a conventional loan on an additional property

When a fix and flip loan probably isn't the right fit

• You plan to live in the home. Use an FHA 203(k) or conventional renovation loan instead.
• The margin is thin. At 10% to 13% interest plus points, a flip that pencils at a 15% gross margin can lose money after carrying costs.
• You intend to hold the property long term from day one. A DSCR loan or conventional investment loan will cost far less.
• You do not have the cash to fund the first rehab stage before reimbursement.

Key risks to understand

Carrying cost compounds every month you run late. On a $221,000 loan at 11%, interest is roughly $2,000 a month before taxes, insurance, and utilities. A three month delay can erase a meaningful chunk of profit.

The draw schedule can starve the project. You pay contractors first and get reimbursed after inspection. Underfunded investors stall between draws. Build a cash buffer for at least the first two stages.

ARV is an estimate. If the market softens or the finished product does not match the comps, the sale price falls and the loan does not. Underwrite your own ARV conservatively and do not rely on the lender's number.

Extensions are not guaranteed. Most lenders will extend for a fee, but they do not have to. A project that runs past maturity with no sale and no refinance in place is in default.

How to prepare before applying

• Form your LLC and open a business bank account before you make offers
• Assemble a track record file: closing statements, before-and-after photos, and profit on each prior project
• Get written contractor bids and build a line-item scope of work for the target property
• Pull your own comps for the ARV and be ready to defend them
• Set aside cash for the down payment, closing costs, the first draw, and 6 months of interest
• Line up your exit before you close: a listing plan or a DSCR lender ready to refinance

Common questions