The Quick Read: Hard money contingency, reserves, and draws are set by each lender’s loan agreement, so a flipper running several projects has to size three separate cushions for every open deal: a contingency line inside the rehab budget, interest carry, and verified liquid cash outside the loan. Volume earns better leverage, but it never removes the cash each project ties up.
- Contingency is a budget line inside the rehab, not spare money and not the same thing as reserves.
- Reserves are verified liquid assets the lender wants to see outside the loan.
- Rehab money sits in a holdback and is released in draws after inspected work.
- Your cash and your contractor capacity, not your deal flow, cap how many projects you can run at once.
- Terms vary by lender, property, and experience, and nothing here is a commitment to lend.
Key Terms Defined
Contingency is a separate line in the rehab budget set aside for repairs you did not see coming. It pays for the scoped work and related surprises, not for upgrades.
Reserves are liquid assets, like bank or brokerage balances, that a lender verifies before funding. They cover cash to close, interest carry, and overruns.
Holdback is the part of the loan the lender keeps in a controlled account instead of handing you at closing. It is released as work is finished.
Draw is a release from the holdback. You request it, an inspector verifies the work, and the lender pays.
Retainage is a slice of each draw the lender keeps until the project is complete.
Interest reserve is money set aside to pay loan interest while the property is being rehabbed. Some programs fund it from the loan, and others want it as a separate deposit.
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.
How the Money Actually Moves
Hard money flip loans work in two parts. The lender funds the purchase advance at closing, then holds the rehab money back and releases it in draws against completed work. Yieldstack’s explanation of fix-and-flip draw schedules describes the same split, and it matches how files look across the wholesale network Lendmire places them with.
Here is the sequence from start to finish:
1. Scope and budget. You submit a line-item budget built from contractor bids. The lender builds draw milestones from it.
2. Contingency line. It sits as its own line in that budget, not as slack hidden inside other lines.
3. Closing. The purchase advance funds. The rehab budget goes into the lender-controlled holdback.
4. Permits. Lenders commonly want required permits in hand before any rehab money moves.
5. You front the first phase. Draws reimburse work that is finished. Materials sitting in the garage usually don’t count.
6. Draw request and inspection. You report actual costs. An inspector verifies the work, and the lender releases funds less any retainage.
7. Change orders. An overrun needs the lender’s approval before more money releases.
8. Final draw. The lender runs a final inspection and lien checks, then releases the remaining retainage.
Reserve verification happens before step 3. The lender looks at your statements to confirm you can cover cash to close, carry, and surprises without the draw money.
Three Buckets, Three Different Jobs
Most confusion starts when flippers blur contingency, interest carry, and liquidity into one pile. They have different owners and different tests.
| Bucket | Purpose | Who sets it | Leftovers |
|---|---|---|---|
| Contingency | Unforeseen repairs | You, then lender reviews | Often reduces the loan or stays restricted |
| Interest carry | Pay interest during rehab | Lender terms | Not yours to spend on work |
| Liquidity reserve | Cash to close and overruns | Lender, per file | Stays in your account |
On the leverage side, the program figures that frame these buckets are these. Fix-and-flip leverage typically runs 85% of project cost with fewer than two completed projects, 90% of project cost at two or more, and 93% of project cost at five or more. Every tier is capped at 75% of after-repair value. Up to 100% of the rehab budget can fund in draws against completed work, but that is a rehab-budget figure, not a purchase loan-to-value. Terms run 6-18 months, interest-only, and a 620 credit score is the typical minimum with added conditions below 660. All of it varies by lender, property, and experience.
Read those numbers carefully. There is no true 100% purchase program. Even at the top tier, you still bring the gap between loan and cost, plus reserves, plus the cash to float the first phase of work.
Sizing Contingency by Risk Tier
A single percentage for every deal is lazy. Size it by what could go wrong on that specific house.
| Risk tier | Typical features | Cushion |
|---|---|---|
| Light | Cosmetic, newer systems | Thinner |
| Standard | Mixed scope, older roof or HVAC | Middle |
| Heavy | Older stock, structural, termite history | Thickest |
Two more inputs should move the number. First, your own history: if your last several flips ran over by a similar share of budget, your contingency should reflect that gap, not a generic rule. Second, contractor track record. A crew you have used often is easier to budget than a new one.
Some borrowers treat the contingency as a loan amount to maximize. That backfires. A thicker contingency raises the rehab budget, and every dollar of that budget has to be justified to the inspector.
Interest Carry and the Float Between Draws
Interest carry is where good projects get strangled by slow schedules. Yieldstack notes that draw speed, inspection cadence, and whether interest accrues on undrawn funds decide the real carrying cost. Lenders split on that last point. Some charge interest on the full loan from day one, and others charge only on the drawn balance. Read that clause before you compare offers.
Size carry for the longest realistic timeline, not the planned one. Programs typically run 6-18 months, interest-only. A flip scoped for the short end of that range can still slip past it when permits stall or a crew disappears. If the carry only works on the best-case schedule, the file is thin.
The float is the other squeeze. Because draws reimburse finished work, you pay contractors for the first phase from your own cash. Inspections that take longer than planned stretch that gap. Experienced flippers build a buffer into contractor agreements so crews stay paid while a draw is pending.
Running Several Rehabs at Once
Volume buys leverage, but liquidity still gates approval. A flipper with five or more completed projects can reach the top leverage tier, and a flipper with fewer than two sits at the lowest. That tiering rewards a track record. It does not exempt anyone from reserves.
Reserves do not simply add up across loans, and they do not simply disappear either. Consider how it plays out:
- Open projects peak in cash need at different times. A flip in its first phase is floating contractor costs. A flip near the end is waiting on retainage.
- Staggering starts spreads the peaks. Starting three jobs in the same month stacks them.
- A single bank balance cannot be counted twice. If one set of statements backs several loans, each lender will want to see enough for its own file, and your real cushion is what remains after the largest exposures.
- Contractor capacity is a limit too. Lenders look at how many projects a borrower has going at once, because a general contractor failing on one job can drag down several.
Here is a practical test before you open the next project. Add up, for each current flip, the float still ahead, the carry through a realistic delay, and the overrun you would absorb if contingency ran dry. Then ask whether your verified liquid cash covers the worst two projects hitting trouble together. If it only covers one, the next deal is a stretch, not a growth step.
Lendmire’s piece How to Structure a Blanket Hard Money Loan as a High-Volume Flipper covers the other side of volume, which is how one facility can carry several properties.
What Counts as a Reserve?
Lenders want liquid, verifiable assets. Checking, savings, and brokerage balances are the cleanest. Treatment of other assets varies. Home equity, for example, does not count as cash reserves on some files and gets different treatment on others, so ask before you rely on it. Retirement accounts and credit lines also vary by lender.
A few rules of thumb hold across most programs. The money has to be yours and seasoned in your account. It has to sit outside the loan. It also has to be separate from the contingency line, which is inside the rehab budget and restricted.
Governance: A Simple Discipline That Protects the Exit
High-volume flippers do better with written rules than with good intentions. Four will do:
- A draw-down rule. Contingency is released only for scoped work or related surprises, and only with a logged reason.
- A change-order log. Every overrun is recorded and approved before work proceeds. Lenders require that approval anyway.
- A replenishment policy. If contingency gets spent early, you decide in advance whether to top it up from cash or cut scope.
- A leftover rule. Unused contingency is not profit to spend mid-project. On the HUD template, it is applied to prepay principal at final release. Private lenders handle it per contract, so confirm what yours does.
When Contingency Runs Out
Run through the options in order. Each has a cost.
1. Bring more cash. It is the simplest option and it draws down your reserves for the other open projects.
2. Cut scope. You protect liquidity, but you may hurt the resale or rent value.
3. Request a modification. A lender may re-underwrite the file, which can change terms.
4. Bring in partner capital. It fills the gap but shares the upside.
Overruns that eat the profit can push a flipper toward renting the property instead of selling it. Many investors refinance out of hard money into long-term DSCR financing once the property is stabilized, and Lendmire brokers that path. DSCR underwriting qualifies primarily on property-level rental income covering the payment, subject to lender guidelines. Clearing a coverage ratio is not the same as positive cash flow, because repairs, vacancy, and management sit outside that calculation. For a closer look at that decision, see Lendmire’s guide on how a sell vs. DSCR hold on a hard money flip for a high-volume flipper plays out, and the complete DSCR loans guide covers the loan itself. Tax treatment varies, so consult a qualified professional.
Common Mistakes
- Treating contingency as upgrade money. It is restricted, and spending it early leaves you exposed.
- Assuming 100% means zero cash. Even the most generous structures ask for cash to close, carry, and a buffer.
- Counting one bank balance against several loans. Each file needs its own proof.
- Planning carry on the best-case schedule. Size for the longest realistic timeline.
- Skipping the undrawn-interest clause. It changes carry cost when projects slip.
- Assuming experience waives reserves. Experience raises leverage. Lenders still want to see liquidity.
- Looking for a federal rule on draws. None sets them for flip loans. HUD’s draw limits apply only to its own rehab product.
For deeper background on the mechanics discussed here, see HUD Handbook 4240.4 REV-2 (203(k)).
Frequently Asked Questions
Does hard money fund the whole rehab at closing?
No. The lender funds the purchase advance at closing and holds the rehab budget back. You draw against completed, inspected work. Up to 100% of the rehab budget can fund in draws on some programs, but that is paid out in stages, never up front.
Are contingency and reserves the same thing?
They are different. Contingency is a line inside the rehab budget for unexpected repairs. Reserves are liquid assets outside the loan that the lender verifies. You need both, and one does not replace the other.
Do experienced flippers still need reserves?
Yes. A track record moves you up the leverage tiers, with 93% of project cost at five or more completed projects, each tier capped at 75% of after-repair value. Lenders still verify liquidity. Exact requirements vary by lender, property, and experience.
How many draws should a flip have?
Private lenders set the count by contract, and there is no standard. Fewer draws can cut inspection costs, but more milestones keep contractors paid. HUD caps draws on its own Limited 203(k) product, and that cap does not apply to private flip loans.
What happens to unused contingency?
It depends on the loan agreement. Under HUD’s template, unused contingency prepays principal at final release. A private lender may do the same, release it, or leave it with the holdback. Ask before closing.
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. Lendmire is a broker arranging financing through select lenders in its wholesale network across 41 markets, including Washington, D.C. Nothing here is a commitment to lend.
For hard money guidelines and terms on your project, ask Lendmire to walk through the options for your file.
For current guidelines and terms, see Lendmire’s DSCR loan programs page.
About Lendmire
As a non-QM mortgage broker (NMLS# 2371349), Lendmire facilitates DSCR investor loans across 41 markets, including Washington, D.C. DSCR eligibility is generally reviewed around property-level rental income instead of personal income documentation, subject to lender guidelines, serving LLC-structured portfolios and self-employed borrowers who don’t fit conventional boxes. A two-time Scotsman Guide Top Mortgage Workplace (2025, 2026).
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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. Yieldstack, fix and flip draw schedules
2. HUD Handbook 4240.4 REV-2 (203(k))
This article is part of Lendmire’s hard money loan program — full qualification details, guidelines, and scenarios live on the program page.
Related reading: Hard Money Loan Credit Reporting Rules for Personal Credit · How to Exit Hard Money When Your Appraisal Falls Under All-in Cost · Hard Money vs Cash Purchase Requirements for a Rental Property
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.