The Quick Read: A hard money loan is sized at closing and generally does not grow when your rehab costs do, so an overrun is paid from the contingency in your budget first, then your own cash, and only occasionally from a lender-approved budget change that still has to fit under the loan’s cost and after-repair-value caps. The overrun also raises what you owe at exit, so plan the gap before demolition, not after. Terms vary by lender, property, and experience, and nothing here is a commitment to lend.
- Contingency comes first. A full gut on an older house needs a much bigger cushion than cosmetic work.
- Draws reimburse finished work. You float the cost of each phase, then the lender repays you after inspection.
- The cap sets your headroom. Fix-and-flip leverage tops out at 93% of project cost for the most experienced tier, and every tier is capped at 75% of after-repair value.
- Ask before the work starts. A scope change generally needs lender approval in advance.
- Overruns hit the exit. Extra spend and extra months shrink what a long-term refinance can pay back.
Key Terms Defined
Contingency is money set aside inside the rehab budget for surprises. It is not padding.
Draw is a payment from the lender’s rehab holdback, released after the lender confirms work was completed.
Holdback is the part of the loan the lender keeps back and pays out in draws instead of at closing.
Change order is a written request to alter scope or cost after the budget is approved.
After-repair value (ARV) is what the property is expected to be worth once the rehab is finished. Lenders cap the loan against it.
Loan-to-cost is the loan as a percentage of what you spend on the project: purchase plus rehab.
Seasoning is the waiting period a long-term lender wants after you buy before it will refinance on a larger basis.
What this loan actually costs to carry.
Hard money is sized against the project and priced by time. Enter the deal and see how much the program will lend, the cash required at closing, the carry while you hold it, and what is left at the exit.
Leverage tiers on the current program: 85% with fewer than 2, 90% with 2 or more, 93% with 5 or more completed projects — every tier capped at 75% of after-repair value. Loan amounts up to $5,000,000, larger by exception; terms of 6 to 18 months, interest-only, no prepayment penalty. The rehab portion funds in draws against completed work, not at closing.
Program parameters shown update from Lendmire’s centralized guideline source. Rate, points, and months are editable assumptions, not quoted terms.
Cost cap sets the loan · positive spread
Illustrative estimate only — not a quote, Loan Estimate, approval, or commitment to lend. Rate, points, and months are editable assumptions. Hard money is business-purpose financing for real estate investors, not a consumer mortgage. Leverage on the current program tops out at 93% of project cost for investors with a documented track record, capped at 75% of after-repair value, with rehab funding up to 100% of the documented budget released in draws; actual terms vary by lender, borrower experience, property, and exit. Lendmire is a mortgage broker, not a lender.
Why Full-Gut Rehabs Overrun
Full gut rehabs overrun because walls, floors, and systems are hidden until demolition. You price what you can see, then the crew opens the house and finds what you couldn’t. A gut is less a single job than a chain of discoveries.
| Cause | When it shows up | How a lender usually sees it |
|---|---|---|
| Hidden wiring or plumbing | After walls open | Legitimate if documented |
| Foundation or structural fix | Demo or engineer visit | Legitimate; needs a change order |
| Permit or code-driven scope | Plan review or inspection | Often legitimate |
| Material price jumps | During buy-out | Mixed |
| Scope creep and upgrades | Mid-project | Avoidable; usually yours |
| Contractor delay | Throughout | Adds carry, not hard cost |
That last row matters. A hard-cost overrun and extra carrying time are different problems. Longer timelines add interest, taxes, and insurance on top of the construction overage. Plan for both buckets, because the loan term runs 6-18 months on this program and the clock does not pause when the crew finds knob-and-tube wiring.
What a Hard Money Lender Will and Won’t Do
The lender will not simply add money because you went over. The loan is sized at closing against its caps, and any increase is the lender’s choice. Most hard money lenders treat the approved budget as the ceiling.
The caps explain why. On this program, fix-and-flip leverage runs 93% of project cost at 5 or more completed projects, 90% at 2 or more, and 85% with fewer than 2. Every tier is capped at 75% of ARV. Up to 100% of the rehab budget funds in draws against completed work. That figure applies to the rehab budget, not the purchase. These figures vary by lender, property, and experience.
So when an overrun hits, the lender asks a few questions:
- Was the overrun caused by a hidden condition, or by sloppy budgeting?
- Does the extra spend support a higher finished value?
- Is the loan already at its ARV cap?
- Do you have a track record and liquid cash?
- Does the exit still work?
If the loan sits at its ARV cap, there is no room to add loan dollars. Period. If there is headroom, a lender may approve a budget modification, especially for a documented structural surprise from an experienced borrower. Small changes within the budget are different. Those usually just move money between line items and use up contingency.
Lender behavior here comes from loan documents, not a rulebook, so read yours before you close.
How to Fund a Full-Gut Rehab Overrun, in Order
Fund the gap in this order: contingency, then your own liquid cash, then scope and contractor adjustments, then a lender modification, then a change of exit. Each step costs you more than the one before it. Work down the list and stop when the gap is covered.
| Step | Source | Main risk | Effect on exit |
|---|---|---|---|
| 1 | Contingency in the budget | Gone if spent early | None, if not exceeded |
| 2 | Your liquid reserves | Drains your cash cushion | More of your cash in the deal |
| 3 | Scope cuts or phasing | Weaker finished product | May lower appraised value |
| 4 | Contractor renegotiation | Quality and lien risk | Neutral |
| 5 | Lender budget modification | Lender discretion; caps | Raises the payoff |
| 6 | Change the exit | New tests to pass | Rental refinance path |
Contingency first. Many investors budget 20% or more on a full gut of an older house, versus a much smaller cushion on cosmetic work. For contrast, FHA 203(k) is a homebuyer rehab program that mandates a funded reserve. A reproduction of HUD’s 203(k) rules calls for at least 10% on properties older than 30 years, up to 20% where major remodeling is planned, and a 15% minimum where utilities are off. That reserve sits in escrow and is released if unused. Hard money has no such mandate. You hold the cash yourself.
Liquid reserves second. This is your own money beyond the contingency. Running out of accessible cash mid-project is a common way these deals stall, so keep reserves separate from what you need at closing.
Scope cuts and contractor talks third. Cut finishes, not systems. Phase work that doesn’t affect appraised value. Renegotiate payment timing, but never so aggressively that you invite a contractor to walk.
A lender modification fourth. Ask early and bring paper. More on that below.
A new exit last. If the flip has lost its margin, you can hold it as a rental. Many investors refinance out of hard money into long-term DSCR financing once the property is stabilized, and Lendmire brokers that path.
What an Overrun Does to Your Exit
An overrun raises your all-in cost against a ceiling that doesn’t move. That hurts twice: your profit shrinks, and the cash you must bring to the exit grows. The math below uses modeled assumptions, expressed as shares of ARV. It is not market data, and it simplifies the real purchase-plus-holdback split.
| Item | Share of ARV |
|---|---|
| Purchase price | 60% |
| Rehab budget | 25% |
| Total project cost | 85% |
| Loan at 85% of project cost | 72.25% |
| Headroom under the 75% cap | 2.75% |
| Overrun (20% of rehab budget) | 5% |
| New total cost | 90% |
| Extra cash if the loan stays fixed | 5% |
| Extra cash if lender raises loan to the cap | 2.25% |
Even a generous lender can only add 2.75 points before it hits the cap. The other 2.25 points come from you. And if the overrun had been bigger, the gap would have grown dollar for dollar.
The DSCR refinance side
If the plan is to refinance into a long-term rental loan, the overrun follows you. The new lender sizes on its own appraisal and the property’s rent, not on your ARV estimate. Before the seasoning period passes, some programs size on cost basis: purchase plus documented rehab. That makes your invoices and draw history valuable. Keep them organized.
DSCR cash-out on a standard rental tops out around 75% LTV across most of the network. About 6 months of seasoning is the common expectation. The seasoning clock generally runs from the recorded deed, not from the day the rehab finishes. A hard money cash-out or rate-and-term refinance on this program runs up to 65% of value.
DSCR loans are designed for non-owner-occupied investment properties. Because they are business-purpose investor loans, they are reviewed differently from a standard owner-occupied mortgage. The loan is reviewed primarily on property-level rental income covering the payment, subject to lender guidelines. Clearing 1.00 coverage is not the same as positive cash flow, since repairs, vacancy, and management sit outside the calculation. For the full picture of how the refinance side works, read the complete DSCR loans guide.
How to Ask Your Lender for a Budget Revision
Ask as soon as you see the problem, not when the money runs out. Lenders respond better to a documented surprise than to a late scramble. Scope changes generally need approval before the work starts, so a request made after the crew has already framed the new wall is a harder conversation.
Bring a package:
- A written change order describing what changed and why.
- Contractor bids or a revised itemized scope, by trade.
- Photos of the hidden condition.
- A third-party report, such as an engineer’s note on a foundation issue.
- An updated budget showing what remains and where contingency stands.
- A short statement of how the extra spend supports finished value and the exit.
If you can, submit the request during escrow rather than after closing. Some lenders treat it more cleanly before the loan is final. Policies differ, so ask.
Keeping Draws Alive When an Overrun Hits Early
An early overrun can starve later draws, because draws pay for finished work, not for good intentions. Most lenders pay by percentage of a line item completed. Half a finished line earns half the draw. Your crew’s schedule and your lender’s definition of complete need to match.
Bank practice offers a useful benchmark. The OCC’s handbook on commercial real estate lending notes that banks normally retain 10 to 20 percent of each payment to cover overruns or unpaid supplier bills. It also says draw requests should include waivers showing subcontractors and suppliers have been paid. Private hard money lenders aren’t bound by that guidance, but many behave the same way.
What helps in practice:
- Submit a complete package each time. A missing lien waiver holds up release.
- Re-slice line items with your lender’s approval so money isn’t stuck in finished lines.
- Expect a per-draw inspection fee and plan for it in the budget.
- Float the first phase yourself. Even 100% of the rehab budget funding in draws means you front the cost before it is reimbursed.
Holdbacks also don’t override a subcontractor’s lien rights. Unpaid subs can lien the property under state mechanic’s lien law unless waivers are collected.
Stop, Cut, or Continue: A Decision Rule
Ask whether the next dollar adds value or only erodes margin. A structural repair that the appraiser and buyer will recognize is different from an upgraded countertop you decided you liked. Run three checks.
Does the spend support value? An improvement may support a higher appraised value, depending on comps and underwriter review. Never assume it will.
Is the loan at its cap? If yes, every extra dollar is yours. That changes the math on marginal upgrades fast.
Does the exit still work? If the sale margin is gone, ask whether the property still covers its debt as a rental. If the rent comfortably clears the full monthly obligation, a hold-and-refinance path may be worth reviewing. If not, cut scope or sell.
This one is a genuine judgment call. Some investors keep spending to finish a house that is half-gutted and impossible to sell as is. Others cut losses. The better choice depends on how much liquid cash remains after the next phase.
Edge Cases Where the Usual Rule Breaks
The loan has headroom and you have a track record. A lender may approve a supplement, especially when a documented structural issue supports the value. This is the exception, not the plan.
The house is too far gone for phased inspection. If the property needs work that doesn’t fit a draw-by-draw model, ask about construction financing instead.
The profit is gone but the property isn’t. A flip that lost its margin can become a rental. Coverage and seasoning are separate tests, so a strong rent number does not waive the seasoning period.
The overrun is mostly time. Carry costs rise with delay. You may need cash for interest, taxes, and insurance even if hard costs hold. On a 6-18 month interest-only term with no multi-year option, a long delay can crowd the exit. Investors who need longer runway refinance into long-term rental financing.
Setting Up the Deal So You Don’t Need This
Most overrun fixes are cheaper before closing. Size the cushion into underwriting, not afterward.
- Get written bids. Verbal estimates become arguments. Itemized bids become the basis for draws.
- Add contingency before you submit the scope. Don’t hand the lender a budget with zero room.
- Keep a separate liquid reserve. Contingency lives in the budget. Reserves live in your account.
- Know which cap binds. If your loan-to-cost and ARV math leaves no headroom at the start, an overrun cannot be financed later.
- Match your tier to your track record. The 93% tier is reserved for experienced investors. First-time investors qualify at the lower leverage tiers, with a 620 minimum credit score and additional conditions below 660. Underwriting stays asset-based: property, plan, and exit.
Parameters vary by lender, property, and experience.
Frequently Asked Questions
Will my hard money lender give me more money if I go over budget?
Usually not by default. The loan is fixed at closing, and any increase is the lender’s discretion. It is limited by loan-to-cost and ARV caps. A documented structural surprise, a track record, and headroom under the cap improve your chances.
How much contingency does a full-gut rehab need?
More than cosmetic work. Many investors budget 20% or more on an older house. Contingency under that level can leave you paying out of pocket when walls open and the surprises start.
What if I run out of cash mid-project?
Stop adding scope and talk to your lender right away. Options include scope cuts, contractor renegotiation, a lender-approved modification, or a change of exit. Running dry with no plan is how projects stall, so a separate liquid reserve is the best defense.
Does an overrun affect my DSCR refinance?
Yes. Extra spend raises your all-in cost and your payoff, while the new lender still sizes on its own appraisal and the property’s rent. A larger overrun can shrink cash-out proceeds and leave you bringing money to the exit.
Can I refinance a hard money flip into a rental if the profit is gone?
Possibly. The property has to clear the long-term lender’s coverage, credit, and seasoning tests. Select lenders review properties on a case-by-case basis. Lendmire arranges that path through its wholesale network.
Next Steps
If you are buying, rehabbing or refinancing an investment property and want to see how the numbers work, Lendmire can help you compare hard money options based on the project, the exit plan, leverage, and your goals. Lendmire arranges financing through select lenders in its network across 41 markets, including Washington, D.C.
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For current guidelines and terms, see Lendmire’s hard money loan programs page.
About Lendmire
A DSCR-focused mortgage broker, Lendmire (NMLS# 2371349) places investor financing across 41 markets — 40 states plus Washington, D.C. — with DSCR eligibility generally reviewed by the lender on property cash flow instead of tax returns, subject to lender guidelines. Scotsman Guide named Lendmire a Top Mortgage Workplace in 2025 and 2026.
The exit plan matters as much as the purchase price on short-term financing – see the hard money loan overview.
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Informational only. Not a Loan Estimate, approval, or commitment to lend. Program availability and eligibility are subject to lender guidelines, credit approval, property review, and underwriting.
References
1. HUD FHA 203(k) contingency rules (reproduced PDF)
2. OCC Comptroller’s Handbook, Commercial Real Estate Lending (previous version)
This article is part of Lendmire’s hard money loan program — full qualification details, guidelines, and scenarios live on the program page.
Related reading: DSCR Cash-Out Now vs Waiting for Hard Money and Rehab Card Payoff · Renting to a Parent vs. a Stranger on a DSCR Loan · Can a DSCR Loan Use Market Rent for an Inherited Tenant?
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
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Required disclosures. Lendmire (NMLS# 2371349) operates as a licensed mortgage broker, not a direct lender or depository. The discussion in this article is general in nature and should not be relied upon as financial, legal, or tax advice — every investment scenario is unique and should be reviewed by a qualified professional. Any loan inquiry is subject to lender underwriting, and this article is not a commitment to lend or a guarantee of approval. Mortgage rates, loan terms, and program guidelines vary by borrower, property, and state, and may change without notice. Equal Housing Opportunity. Verify licensure at NMLS Consumer Access.