Rehab Loan
What is a Rehab Loan?
A rehab loan finances both the purchase and the renovation of a property, releasing the repair money in stages as the work is completed. Real estate investors use rehab loans (also called fix and flip or renovation loans) to buy distressed or dated properties, improve them, and then sell them or refinance into long-term rental financing.
An investor rehab loan is a short-term, business-purpose loan secured by the property. It is usually interest-only, commonly runs 6–24 months, and is repaid in full when the investor sells or refinances. The lenders that make these loans are often called rehab lenders, fix and flip lenders or hard money lenders.
How Does an Investor Rehab Loan Work?
Most investor rehab loans follow the same sequence from offer to payoff:
- Term sheet and underwriting: You submit the property, purchase price, rehab budget and scope of work. The lender issues a term sheet, reviews your experience and finances, and orders an appraisal that estimates the property’s as-is value and its after-repair value.
- Closing: The lender funds its share of the purchase price at closing, and you bring the down payment and closing costs. The rehab budget is not paid out at closing; the lender holds it back for the renovation.
- Renovation and draws: You or your contractor complete a phase of work, then submit a draw request. The lender inspects the property to verify the work and releases funds for what is finished, following the draw schedule until the budget is spent. Because draws typically reimburse completed work, plan to cover each phase before it is paid back.
- Monthly payments: Payments are usually interest-only. Depending on the lender, interest accrues on the full loan amount from day one or only on the money disbursed so far, so check your term sheet.
- Payoff: You repay the loan in full when you sell the finished property or refinance it into a long-term rental loan. If a project runs long, some lenders offer extensions, often for a fee.
For a closer look at the draw process, see the construction loan draw process, step by step.
How Rehab Lenders Size the Loan
Rehab lenders use three numbers to decide how much they will lend:
- As-is value: What the property is worth today, in its current condition. Many lenders base the amount funded at closing on the lower of the purchase price and the as-is value.
- After-repair value (ARV): What the property should be worth once the planned work is done, estimated from renovated comparable sales. Lenders typically cap the total loan at a percentage of ARV so equity remains when the project is finished.
- Loan-to-cost (LTC): The loan as a percentage of total project cost, meaning the purchase price plus the rehab budget. An LTC cap keeps some of the investor’s own cash in the deal. See loan-to-cost ratio.
The loan is usually the lowest amount these limits allow. The example below uses hypothetical limits of 85% of total cost and 70% of ARV. Those percentages are for illustration only; real limits vary by lender, experience, scope of work and property.
| Illustrative rehab loan | Amount |
|---|---|
| Purchase price | $200,000 |
| Rehab budget | $60,000 |
| Total project cost | $260,000 |
| After-repair value (ARV) | $380,000 |
| Limit at 85% of total cost | $221,000 |
| Limit at 70% of ARV | $266,000 |
| Loan amount (lower of the two limits) | $221,000 |
| Rehab holdback, released in draws | $60,000 |
| Loan funded at closing toward the purchase | $161,000 |
| Investor’s cash toward the purchase (before closing costs) | $39,000 |
Here the cost limit is the tighter one. If the appraisal put the ARV at $300,000 instead, the ARV limit would fall to $210,000 and become the binding limit, and the investor would need $50,000 toward the purchase instead of $39,000. That is why a well-supported ARV and a realistic budget matter as much as the purchase price. Run your own numbers with the fix and flip ROI calculator.
Investor Rehab Loans vs. Homeowner Renovation Mortgages
Search for “rehab loan” and you will also find FHA 203(k) and Fannie Mae HomeStyle renovation mortgages. Those programs are built mainly for people buying or improving a home to live in, and FHA 203(k) loans are limited to owner-occupied primary residences. Investor rehab loans are business-purpose loans for properties the borrower will sell or rent out, not live in.
| Feature | Investor rehab loan | Homeowner renovation mortgage |
|---|---|---|
| Purpose | Buy, renovate, and sell or rent an investment property | Buy or renovate a home, mainly one the borrower lives in |
| Borrower | Often an LLC or other business entity | An individual |
| Term | Short term, commonly 6–24 months | Long term, often 15–30 years |
| Payments | Usually interest-only | Principal and interest |
| Underwriting focus | The deal: cost, ARV, scope of work, experience and exit | Personal income, debt-to-income ratio and credit |
| Speed | Built to close quickly | Standard mortgage timelines, often longer because of the renovation review |
What Is a Hard Money Rehab Loan?
“Hard money” refers to loans from private lenders that are underwritten mainly on the property and the project rather than on personal income. Most hard money loans for property rehab work exactly as described above. Compared with a bank, a hard money rehab lender typically closes faster and is more flexible about property condition, in exchange for a higher rate and an origination fee. Learn more in hard money fix and flip loans, or compare lenders in our guide to the best hard money lenders.
What Do Rehab Lenders Look At?
Every rehab lender weighs both the deal and the borrower. Expect questions about:
- Experience: How many similar projects you have completed. Many lenders work with first-time investors but may ask for more cash in the deal.
- Budget and scope of work: A line-item budget that matches the plan, covering hard costs such as labor and materials and soft costs such as permits and plans.
- After-repair value: Whether renovated comparable sales nearby support your projected value.
- Credit: Your credit history, including how you have handled other real estate debt.
- Liquidity and reserves: Cash for the down payment, closing costs, monthly interest and cost overruns, usually verified with bank statements.
- Exit strategy: How the loan will be repaid, either by a sale supported by comps or by a refinance supported by expected rent.
How to Choose a Rehab Lender
Rate matters, but on a rehab loan the lender’s process can cost or save you more than a fraction of a point. Compare:
- Direct lender or broker: A direct lender underwrites and funds the loan itself and manages the draws. A broker places your loan with another lender, which can add fees and another layer between you and the decision-maker.
- Draw speed: Ask how draws are requested, how quickly inspections are scheduled, and how many business days it takes to fund. Slow draws stall contractors and add holding costs.
- Term sheet transparency: Get a written term sheet showing the rate, origination fee, other lender fees, leverage, rehab funding and how interest is charged before you pay for anything.
- Prepayment terms: Whether a prepayment penalty or minimum-interest period applies if you finish and sell early.
- Closing speed and coverage: How long closings typically take, and whether the lender works in your state and with your property type.
Rehab Loans with LYNK Mortgage
LYNK Mortgage is a direct private lender offering fix and flip (rehab) loans to real estate investors. Each loan funds the purchase and the renovation: the rehab budget is held back at closing and released through online draw requests after an inspection verifies the completed work, with draws typically funded in 2–5 business days. Draws cover completed work only, not contractor deposits.
- Leverage: Based on loan-to-cost and after-repair value. See current numbers on the fix and flip loans page.
- Terms: Fixed rates, interest paid monthly, 30-day rate locks, and no prepayment penalty on fix and flip loans.
- Transparency: Instant online term sheets with only a soft credit pull, and no application fees.
- Service and speed: A dedicated loan officer on every deal and typical closings in 7–15 days.
- Experience: First-time flippers are welcome, with more equity in the deal.
- Eligibility: Business-purpose loans on non-owner-occupied investment property, made to LLCs and corporations, with a $150,000 minimum loan amount. See where we lend.
A third-party appraisal is required before closing. Closing costs are not financed within the loan-to-cost, and borrowed down payments are generally not allowed. New to flipping? Start with fix and flip loans for beginners, then see current terms and get an instant term sheet on the fix and flip loans page.