The Quick Read: Treat contingency as its own line in the rehab budget, sized as a percentage of hard costs, and plan to pay for it from your own cash. Most published guidance lands between 10% and 20%. First-timers should lean toward the upper half of whatever band fits the property.
- Contingency covers scope surprises such as rot, bad wiring and hidden plumbing. It is not profit and not a place to park interest payments.
- Pick the percentage by how much you could see before buying: a clean cosmetic job sits low, an older house with utilities off sits high.
- Hard money draws reimburse finished work, so you front costs first. A surprise has to be paid before it can be reimbursed.
- Contingency also lowers the price you can pay, because it comes out of the margin before you make an offer.
- Keep a separate cash reserve for carrying costs and delays. It is a different pool from contingency.
What Rehab Contingency Actually Is
Rehab contingency is a set-aside inside your renovation budget for costs you could not see when you wrote the scope. It is a line item with a percentage attached. It is not optimism, and it is not extra profit.
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.
The base matters. Contingency is calculated on hard costs, meaning the construction and repair spending. Interest, taxes, insurance and utilities during the project belong in a separate carry bucket. Mixing the two can leave you short on both.
Picture the budget as three pools: the repair scope with contractor bids, the contingency line on top of it, and a cash reserve for carry and timing gaps. Each pool answers a different risk. Contingency answers “what is behind the wall.” The reserve answers “what if this takes longer than planned.”
How Do You Budget Rehab Contingency on a First Flip?
Start with a line-item scope by trade, backed by contractor bids, and add a contingency row on top. Never use a miscellaneous row. If a cost has no home, break it out or fold it into contingency so you can see what is eating the buffer. BiggerPockets recommends collecting three quotes per rehab item and adding contingency to the quotes you gather.
Then choose the percentage. Published ranges differ, and the gap has a reason: the authors assume different levels of visibility. Flippers.live suggests 8% to 10% for cosmetic flips with stable systems and clean inspections, 10% to 15% for moderate rehabs, and 15% or more for older homes or water, foundation or code issues. Real Estate Skills advises reserving 10% to 15% for surprises behind the walls. BiggerPockets sits lower, at 5% to 10% on top of collected quotes.
A practical read of that spread: 8% is the floor, and 15% to 20% is the norm when you could not see much. Nothing governs the number. No regulator sets it for investor loans, so it comes from practitioner experience and from your own risk tolerance.
A Scoring Method for First-Timers
Use this table as a starting point. It reflects the brokerage’s view from reviewing many flip budgets, and it builds on the published bands above.
| Factor | Lower tier (about 8-10%) | Middle tier (about 10-15%) | Higher tier (15%+) |
|---|---|---|---|
| Property age and systems | Newer, updated | Mixed ages | Older, original systems |
| Pre-offer access | Full walkthrough, utilities on | Partial access | Limited access, utilities off |
| Scope | Cosmetic | Moderate, some layout change | Gut renovation |
| Water or foundation signs | None | Minor staining | Visible or suspected |
| Contractor bids | Three itemized bids | Two bids | One bid or rough number |
Count the columns where the deal lands. Mostly lower tier means the low band. A mix means the middle band. Any single entry in the higher tier, especially water, foundation or limited access, pulls the whole budget toward the top. Then add the first-timer adjustment: move up within your band, because you have not yet learned how your contractors behave when something goes wrong.
Key Terms Defined
Hard costs: the construction and repair spending on the property, excluding interest, taxes, insurance and other holding costs.
Contingency: a separate budget line, usually a percentage of hard costs, held for unexpected repair costs.
Holdback: the rehab money the lender controls and releases in stages rather than at closing.
Draw: a release from the holdback, paid after the lender verifies completed work.
After-repair value (ARV): what the property should be worth once the renovation is finished.
Loan-to-cost: the loan amount as a percentage of project cost, which on a flip includes purchase price plus rehab.
Change order: a written, priced change to the agreed scope.
Retainage: a portion of a contractor’s payment withheld until the work is signed off.
Where Contingency Sits in a Hard Money Budget
Across the wholesale network Lendmire works with, the structure is consistent even when details differ. The lender funds a share of the purchase, and the rehab money sits in a holdback released in draws after inspection. Up to 100% of the rehab budget can fund in draws against completed work on the programs Lendmire places, which is a rehab-budget figure and not a purchase percentage. Purchase leverage is tiered by track record: typically 85% of project cost with fewer than two completed projects, 90% at two or more, and 93% at five or more, always capped at 75% of after-repair value. All of this varies by lender, property and experience, and nothing here is a commitment to lend.
The practical consequence is simple. Draws reimburse work that is already done, so you typically begin with your own cash. Whether a given lender will finance a contingency line inside the holdback depends on that lender. Plan to fund contingency and the first draw from cash, and treat any financed contingency as a bonus rather than the base case. If an overrun is not covered by the approved budget, it lands on you.
Show contingency as a visible line when you submit the budget. Lenders review a budget with a clear buffer more comfortably than one with a lump sum, and a line-item layout also makes your draw requests cleaner. A draw packet usually contains the request, the budget with percent complete, invoices, approved change orders, dated photos and lien waivers. A change order that taps contingency needs lender sign-off, so do not assume you can reallocate money on your own.
Credit and experience matter too. The programs in the network typically want a 620 minimum score, with added conditions below 660. First-time investors qualify at the lower leverage tiers, which is why a first-timer’s cash outlay is larger than the headline loan-to-cost suggests. Underwriting stays asset-based: the property, the plan and the exit.
Put It Into the Deal Math
Contingency belongs in the offer, not just the budget. The maximum-offer logic subtracts selling costs, holding costs, the rehab budget, contingency and your required profit from the after-repair value. Every point of contingency you add lowers the price you can pay. That is the point. A deal that only works with zero contingency is a deal that only works if nothing goes wrong.
Here is a sourced example of the budget side. Flippers.live’s sample budget shows $58,000 of hard costs with a 10% contingency of $5,800. Sophia REI’s walkthrough puts a 15% to 20% contingency on an $80,000 rehab at $12,000 to $16,000. The second number looks large next to the first. It is the cost of buying certainty on a bigger or riskier scope.
Cash planning is where first-timers get caught. Add up the down payment share of project cost, your contingency, the first draw you will front, and your carry reserve. Because the loan is capped at 75% of after-repair value, an overrun that pushes total cost close to that ceiling shrinks your equity cushion. In the worst case you bring cash to the exit.
Stress Test: Three Ways the Job Can Go
These are modeled assumptions, not market data. Assume a 15% contingency on hard costs and see where each outcome lands.
| Scenario | Overrun vs. hard costs | Paid from contingency | Paid from your cash |
|---|---|---|---|
| Clean job | 0% | None | Nothing extra |
| Mid-size surprise | 8% | 8 points of the 15% | Nothing; 7 points left over |
| Overrun beyond buffer | 25% | All 15 points | 10 points of hard costs |
Two things the table does not show. First, a longer job adds carry, so even the mid-size case may draw on your reserve if the delay is real. Second, the third row has no source of approved funds. The lender pays against the approved budget, so you either cover it or renegotiate scope. That is why the first-timer adjustment matters: a 25% overrun on a 10% contingency is a much harder conversation than the same overrun on 20%.
Small upgrades add up, too. Scope creep is a quieter threat than a burst pipe, and a change order discipline keeps it from consuming the buffer unnoticed.
Managing the Buffer During the Job
Use a simple protocol. When something unexpected appears, get a written price. Decide whether it is required (safety, structure, code) or optional (upgrades). Required items go through a change order and draw on contingency, with lender sign-off where the loan agreement requires it. Optional items wait until you know how much buffer is left.
Track actuals against estimates in a spreadsheet with estimate, actual and variance columns, plus a running contingency balance. Review it before every draw request. If half the buffer is gone while the job is a third done, stop and re-scope. That is the moment to cut optional work, renegotiate with a contractor or bring in additional cash.
Some investors also hold back 10% retainage from contractors until sign-off. That is a contractor-side payment tool, separate from budget contingency. It protects quality, not scope surprises.
What Happens to Leftover Contingency
Treatment of unused contingency is contractual and varies by lender. In practice, unspent buffer usually means a smaller final draw or simply a larger profit. Some investors roll it into the next deal’s cash. Tax treatment varies; consult a qualified professional.
Where the Rule Breaks
Older homes with utilities off. If you could not run water, power and HVAC before buying, you are guessing at the systems. Move to the high band. Real Estate Skills notes some foundation repairs run $2,000 and many run $20,000 or more, which shows how wide the uncertainty is.
Gut renovations. When walls, floors and systems all come open, the unknowns multiply. Sit at the top of the range and consider going above it.
Contingency is not an interest reserve. Keep them as separate lines. Interest on a 6-to-18-month interest-only loan accrues whether or not anything breaks, so it belongs in the carry budget.
Upfront draws. Some lenders advance part of the rehab funds at closing. That is an exception, usually reserved for experienced borrowers, and a first-timer should not build a plan around it.
A contrast worth knowing. Owner-occupant renovation loans use fixed reserve rules. Third-party summaries of the FHA 203(k) program describe a minimum 10% reserve, with a higher minimum when utilities were off during inspection. That is an owner-occupant product, not hard money or DSCR, and it is a context point only. Private hard money lenders set their own terms.
Contingency and Your Exit
Contingency discipline protects the exit more than the build. A delayed, over-budget project leaves little room if the after-repair appraisal comes in light. Many investors refinance out of hard money into long-term rental financing once the property is stabilized, and Lendmire brokers that path. The complete DSCR loans guide explains how that financing works.
Model the exit before you buy. On a cash-out refinance of a standard rental, the network typically tops out around 75% LTV, with roughly six months of seasoning a common expectation. Coverage matters too. A debt service coverage ratio compares rent to the monthly housing payment only, and 1.00 is where many select programs start. A separate select-lender path takes coverage below 1.00, with leverage and terms adjusted. Clearing the ratio is not the same as positive cash flow, since repairs, vacancy and management sit outside it. A budget that ran 20% over can leave less equity than the refinance needs, so run your numbers at 15% to 20% contingency before you commit.
Once the rehab is funded, a first-time flipper asking about a rehab budget increase will find that approval is never assured, which is another reason to size the buffer yourself.
First-Timer Mistakes
- Treating contingency as profit. If you plan to keep it, it is not contingency.
- Using one percentage for every deal. The right number depends on the property.
- Counting on the lender to cover overruns. Draws pay against the approved budget.
- Spending 100% of the draw schedule with no buffer. The project stalls when something unexpected appears.
- Folding carry into contingency. The two pools answer different risks.
- Relying on the 70% rule alone. It ignores holding time, transaction costs and contingency.
Frequently Asked Questions
How much contingency do I need on my first flip?
Plan on 10% to 20% of hard costs. Use roughly 10% only if you walked the whole house with utilities on and hold three itemized bids. Go to 15% or higher for older homes, limited access or water and foundation concerns. Because it is your first project, round up within the band.
Is contingency part of the hard money loan?
It depends on the lender, and it varies by lender, property and experience. Rehab money funds in draws against completed work, and the holdback is built from the approved budget. Plan to fund contingency and the first draw from your own cash.
What if costs exceed the contingency?
The overrun lands on you. The lender pays against the approved budget, so you cover the gap with cash, cut optional scope or ask the lender about a budget change, which is not assured. Review your actuals before each draw so you see the problem early.
Do I keep leftover contingency?
Usually yes, in the sense that unspent money means a smaller final draw or a larger profit. Treatment is contractual, so read your loan agreement. Some investors roll leftover cash into the next project.
Is contingency the same as cash reserves?
No. Contingency covers hard-cost surprises. Reserves cover carry, timing gaps and the lag between spending and reimbursement. A first flip needs both.
Next Step
If you are buying, rehabbing or refinancing an investment property on a short timeline 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.
About Lendmire
A non-QM mortgage broker (NMLS# 2371349), Lendmire arranges DSCR financing for real estate investors in 41 markets — 40 states plus Washington, D.C. Because deals are underwritten primarily on property cash flow rather than personal income documentation, the structure suits self-employed buyers and entity-owned portfolios. Lendmire places loans through wholesale investor lenders; it is not a direct lender. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.
Short-term financing tends to work best when the long-term plan is decided early – see the hard money loan overview.
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References
1. BiggerPockets – How to Estimate Rehab Costs
2. Flippers.live – How to Build a Rehab Budget That Protects Your Profit
3. Real Estate Skills – House Flipping Spreadsheet
4. Sophia REI – Fix and Flip Budget Template
5. Tri-State Home Inspections – FHA 203(k) Program
This article is part of Lendmire’s hard money loan program — full qualification details, guidelines, and scenarios live on the program page.
Related reading: Can You Borrow Enough on a Hard Money Loan to Flip a Condo? · Hard Money Loan Documents Required for a Fix and Flip · Hard Money Lender Requirements for the Seller of a Flip
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
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Important disclosures. Lendmire (NMLS# 2371349) is a licensed mortgage brokerage. Lendmire is not a direct lender, depository institution, or financial advisor. All loan inquiries are subject to lender underwriting; this article does not constitute a commitment to lend. Rates, terms, and program guidelines are subject to change without notice and vary by borrower profile, property type, and state. Information in this article is general in nature and is not financial, legal, or tax advice. Equal Housing Opportunity. NMLS Consumer Access: nmlsconsumeraccess.org.