The Quick Read: Yes, a file can be approved when the lender sizes on cost basis, but the approval is for a smaller loan than a fresh appraisal would support, so the result is often a payoff of the hard money loan with little or no cash back. Cost basis here means the purchase price plus documented, receipted improvements. When a lender applies it, that number caps the new loan instead of the appraised after-repair value. This usually happens inside the seasoning window, which is about 6 months on most files across Lendmire’s wholesale network.
- Inside the seasoning window, many programs size on the lower of appraised value or cost basis. After seasoning, they size on appraised value.
- Seasoning is lender policy. It generally runs from the recorded deed, not from the day the rehab ends.
- The cash-out cap is around 75% LTV on a standard rental, applied to whichever value the lender picks.
- The real approval test is whether the cost-based loan covers the bridge payoff plus costs. If it does not, the borrower brings cash to close.
- Rent coverage is a separate gate. A strong appraisal does not fix a weak coverage ratio.
Most investors who ask this question are holding a hard money loan on a finished or nearly finished project. They want to refinance into long-term rental financing and pull their money back out. This article walks through how that file is sized, where it breaks, and what to do when it does. For the broader program picture, see Lendmire’s complete DSCR loans guide.
Why Do Lenders Size on Cost Basis Instead of Appraised Value?
Lenders size on cost basis early in a loan’s life because a recent purchase price is the most reliable value they can see. The appraisal after a heavy rehab is an opinion. The settlement statement and the receipts are paper. Inside the seasoning window, many programs lend against the lower of the two.
The clock matters. On most files, seasoning is measured from the recorded deed. It does not restart when the rehab finishes. It does not start when the bridge funds. Across the wholesale network the common expectation is about 6 months, though individual lender policies vary and some are shorter.
No federal rule sets that window. DSCR loans are business-purpose investor loans, not agency products, so each lender writes its own seasoning and sizing policy. That is why two files with the same property can get different answers from different lenders.
The cost cap also has a purpose beyond caution. Lenders have seen early appraisals come in high on freshly renovated properties. Cost basis keeps the loan tied to money actually spent.
What Counts as Cost Basis?
Cost basis in a lender’s sense is the purchase price plus documented improvements. The concept comes from basic property accounting. IRS Publication 551 explains that the basis of purchased property is usually its cost, and that improvements with a useful life of more than one year increase it. Depreciation reduces it.
Do not confuse the two uses of the word. A lender’s cost basis is a sizing tool. It is not your tax basis, and lenders do not apply your depreciated figure. Tax treatment varies; consult a qualified professional.
Three questions decide what a lender counts:
1. Is the rehab documented? Receipts, invoices, draw records and proof of payment count. Undocumented cash work and sweat equity generally do not.
2. Are closing costs included? Some lenders include purchase closing costs in basis and some do not.
3. Are holding costs included? Interest carried on the bridge, insurance and utilities during the rehab are treated differently from lender to lender.
There is no firm industry rule on items two and three. Ask for the lender’s definition in writing before you plan your exit around it.
How Does Cost-Basis Sizing Change the Math?
Cost-basis sizing changes the math by replacing the after-repair value with a lower number, which cuts the loan. The leverage cap stays the same. Only the value it multiplies changes.
Here is a worked illustration in index units, not market data. Say purchase price plus documented rehab equals 70. The appraised value is 100. The bridge payoff is 60.
- Inside the window, on cost basis: 75% of 70 is about 52.5.
- After seasoning, on appraised value: 75% of 100 is 75.
- The payoff is 60. The cost-based loan falls short by about 7.5 before title and lender fees come out. The seasoned loan clears the payoff with room left over.
Notice that the bridge in this example sits at roughly 86% of project cost. Hard money programs can fund a high share of project cost, with leverage varying by lender, property, and experience. A DSCR cost cap near 75% will not retire a bridge funded that far up the stack. The gap is built into the structure. It is not a sign of a bad file.
Run this test before you apply:
| Test | What to compare |
|---|---|
| Cost-based loan | Leverage cap times (purchase + documented rehab) |
| Total payoff need | Bridge payoff + accrued interest + extension or exit fees + closing costs |
| Result | Loan above need: cash back. Equal: payoff only. Below: cash to close |
Payoff-Only or Cash-Out: Which Label Does the File Get?
The label depends on whether cash returns to the borrower. A refinance that only pays off the bridge and costs is generally treated more gently than one that puts cash in the borrower’s pocket. Paying off hard money is not automatically cash-out.
| Factor | Payoff-only | Cash-out |
|---|---|---|
| Cash back to borrower | None or minimal | Yes |
| Seasoning | Typically lighter | About 6 months is common |
| Leverage ceiling | Often higher | Around 75% LTV on standard rentals |
| Cost-basis effect | Cap usually covers payoff | Cap limits cash returned |
There is a third case that catches people. A lender may allow an early cash-out only up to documented cost. Pulling anything above basis typically brings the full seasoning period back, no matter how strong the appraisal looks. Waivers and shortened windows generally reach basis and stop there.
What Documents Prove Cost Basis?
The paper trail decides how much of your spending the lender will recognize. Build it during the rehab, not at the end. Files stall when a receipt is missing or a payment cannot be traced.
A clean basis file usually includes:
1. The purchase settlement statement showing price and recorded closing costs.
2. The rehab budget and the contractor agreements.
3. Invoices and receipts for materials and labor.
4. Draw records from the bridge lender, with the inspection sign-offs.
5. Proof of payment, such as bank statements or cleared checks, for out-of-pocket work.
6. For the DSCR side, the lease or rent evidence, entity documents if the property sits in an LLC (subject to lender program eligibility), insurance quote and the title information.
Draws funded by the hard money lender and money paid from your own account both count if they are documented. The lender wants proof that the work happened and that the dollars were spent.
Rent coverage is its own gate. The lender divides the rent used for review by the full monthly obligation, meaning principal, interest, taxes, insurance and any association dues. The lender orders its own appraisal, and a rental appraisal form supports the rent figure. About 1.00 is where select programs start. A separate select-lender path takes coverage below 1.00, with leverage and terms adjusted. Stronger ratios open better leverage. Clearing 1.00 does not mean the property cash flows, because repairs, vacancy, management and capex sit outside the calculation.
Does Delayed Financing Rescue an Early Refinance?
Delayed financing rarely rescues a hard money purchase. It was built for buyers who paid cash. A purchase funded by a hard money lien generally fails that cash-purchase condition.
Fannie Mae’s Selling Guide names a delayed financing exception in its cash-out refinance topic. Under it, all other cash-out eligibility requirements still apply, and cash-out pricing applies. It is a seasoning exception, not a separate loan product. That is agency context only, since DSCR loans are not agency loans.
Some DSCR lenders write their own version for true cash buyers. Those versions are lender-specific. They waive seasoning only. Coverage, reserves, appraisal and leverage rules still apply, and the proceeds track documented purchase cost. They generally do not credit post-purchase rehab.
Who Loses Most Under Cost-Basis Sizing?
The investor who bought well below market and rehabbed heavily loses the most. Cost basis understates the equity an appraisal would show, so the cap binds hard. Waiting out seasoning usually returns more cash for this borrower.
The investor who bought near market loses little. Seventy-five percent of price is close to 75% of value, so the cost cap costs almost nothing.
Think about it this way. A deal bought at a deep discount builds its profit into the gap between cost and value. Cost-basis sizing refuses to lend against that gap early. A deal bought near full value has no such gap, so there is nothing to refuse.
This is why the BRRRR assumption of pulling all your money out can break on a short timeline. Investors who pay closer to full value for the property often find the refinance does not return everything, even with a clean appraisal. Seasoning matters most with hard money, because the bridge keeps accruing interest while you wait.
A program that advertises no seasoning may still return cost-based proceeds. Shorter seasoning can also come with different pricing and terms, so compare what each lender actually returns, not just the headline window.
What Are Your Options When the Cost-Based Loan Falls Short?
You have five practical options, and the right one depends on how much the delay costs against how much cash you leave behind.
1. Extend the bridge. Hard money terms run 6 to 18 months, interest-only, and an extension may carry fees. Compare that carry against the extra cash a seasoned refinance returns.
2. Do a payoff-only refinance now and a cash-out later. This retires the bridge but means two sets of closing costs. It makes sense when the bridge is expensive to hold.
3. Bring cash to close. Fund the shortfall yourself and take the cost-based loan. This works when the gap is small.
4. Refinance into another short-term bridge. Hard money cash-out and rate-and-term refinances run up to about 65% of value on the current program, varying by lender, property and experience. The leverage is lower, so run the numbers first.
5. Wait out seasoning. This usually returns the most cash and costs the most carry.
Many investors refinance out of hard money into long-term DSCR financing once the property is stabilized, and Lendmire brokers that path. A related guide DSCR Cash-Out Refinance Lenders When the Hard Money Loan Needs a Permanent Exit covers the exit side in more depth.
The decision framework is simple. Ask whether the extra cash is worth the carry cost of waiting. Ask whether two closings are worth it. Ask whether cash to close is cheaper than either.
What Credit, Coverage and Reserves Do These Files Need?
DSCR programs qualify primarily on property-level rental income covering the payment, subject to lender guidelines. Personal income documentation is generally not the driver. Typical ranges across the network look like this, and every figure varies by lender, leverage and transaction:
- Credit: a 620 floor exists in parts of the network. Most programs want around 660. A 700+ score unlocks the strongest leverage tiers.
- Cash-out leverage: around 75% LTV on a standard rental. Short-term-rental collateral caps lower, with cash-out at 70%.
- Coverage: about 1.00 for select programs, with stronger ratios improving terms.
- Reserves: commonly around 6 months of the full monthly obligation. Some conservative rate-term files at modest leverage can see reserves waived. Larger loans typically step up.
- Property types: manufactured homes, log homes and barndominiums are not offered.
A larger equity position lowers the monthly obligation and can lift coverage. It does not erase leverage caps, credit floors or reserve rules. The strongest files clear both tests, enough equity and enough rental coverage.
Common Mistakes on Cost-Basis Files
These are the errors that derail these files most often.
- Assuming the seasoning clock starts when the rehab ends.
- Ignoring bridge maturity, so the note comes due before the cash-out window opens.
- Planning the exit on the after-repair value instead of the lower of cost and expected appraisal.
- Letting receipts pile up unsorted until the lender asks.
- Assuming every lender defines cost the same way.
- Treating the appraisal as the only number that matters, when rent coverage can cap the loan before equity does.
Plan the exit before you buy. Size the hard money so the DSCR payoff works on the lower of cost and expected appraisal.
What Should You Ask a Lender Before Applying?
Put these questions in writing before you commit to an exit plan:
1. What value basis applies to my file: cost, appraisal, or the lower of the two?
2. Where does the seasoning clock start for my deal?
3. Do purchase closing costs and holding costs count toward basis?
4. Do draws funded by my bridge lender count as cost?
5. What documents prove the rehab spend?
6. If I take cash above basis, does the full seasoning period return?
The best program for your situation depends on the property, your credit profile, your leverage need and your documentation. A broker that shops several wholesale lenders can match the scenario to the program whose seasoning and basis rules fit the plan.
Key Terms Defined
Cost basis: The purchase price plus documented, receipted improvements, used by a lender to cap an early refinance.
Seasoning: The minimum time you must own a property before a lender sizes the loan on appraised value, usually counted from the recorded deed.
Payoff-only refinance: A refinance that retires the existing loan and costs without returning cash to the borrower.
Cash-out refinance: A refinance that returns cash to the borrower, generally at a lower leverage ceiling than payoff-only.
Appraised value: The value a licensed appraiser assigns to the property, which can exceed cost after a rehab.
DSCR: The rent used for review divided by the full monthly obligation of principal, interest, taxes, insurance and dues.
Frequently Asked Questions
Can I pull out all my cash if I refinance a hard money loan before seasoning ends?
Rarely. Inside the window, many programs cap the loan at cost basis, which is purchase price plus documented rehab. Returning cash above that figure typically brings the full seasoning period back. The cash you receive is at most the gap between the cost-based loan and your payoff plus costs.
Is the six-month seasoning rule a law?
No. It is lender policy. DSCR loans are not agency products, and no federal statute sets seasoning for a rental cash-out. Lenders in the network commonly expect about 6 months, and individual policies vary.
Does a great appraisal help inside the seasoning window?
Not much. The lender picks the lower of appraised value or cost basis, so a high appraisal does not raise the cap. It becomes useful once seasoning ends and the loan sizes on appraised value.
What if my hard money payoff is bigger than the cost-based loan?
You have options. You can extend the bridge, do a payoff-only refinance now and a cash-out later, bring cash to closing, or wait out seasoning. Each has a cost, so compare the carry on the bridge against the extra cash a seasoned refinance returns.
Do I still need to meet rent coverage if the appraisal is strong?
Yes. Rent coverage is a separate gate and can cap the loan before equity does. About 1.00 is where select programs start, and a separate select-lender path covers coverage below 1.00 with leverage and terms adjusted. Subject to lender guidelines, a stronger ratio generally opens better leverage.
Planning the Exit Before the Bridge Closes
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. You can reach the team at 828-256-2183 or request a quote.
About Lendmire
Lendmire (NMLS# 2371349) is a mortgage broker that arranges DSCR investor and hard money financing through select lenders in its wholesale network, across 41 markets, including Washington, D.C. Nothing here is a commitment to lend, and every file is underwritten individually by the lender. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.
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References
1. IRS Publication 551, Basis of Assets
2. Fannie Mae Selling Guide B2-1.3-03: Cash Out Refinance Transactions
This article is part of Lendmire’s hard money loan program — full qualification details, guidelines, and scenarios live on the program page.
Related reading: Best Hard Money Cash-Out Refinance Program With No Title Seasoning at All · Best Hard Money Cash-Out Refinance Program With Only Six Months of Reserves · Best Hard Money Cash-Out Refinance Program to Pull Your Original Investment Back Out
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
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Disclosures. The information presented in this article is general market commentary, not financial, legal, or tax advice. Lendmire is a mortgage brokerage (NMLS# 2371349) — not a direct lender or depository institution — and loan placement is subject to lender underwriting. Nothing in this content represents a commitment to lend. Loan terms, pricing, and program availability vary based on borrower qualifications, property characteristics, and state of subject property, and are subject to change at any time. Lendmire complies with Equal Housing Opportunity requirements. Consumer access: nmlsconsumeraccess.org.