The Quick Read: A hard money lender folds your rehab budget into project cost, sizes the loan on that total, then caps the result against the property’s after-repair value, and the lower of those two numbers is your maximum loan. The rehab portion is held back and released in draws as work is completed, not paid out at closing.
- Leverage is tiered by experience: 85% of project cost with fewer than 2 completed projects, 90% with 2 or more, and 93% with 5 or more.
- Every tier is capped at 75% of after-repair value (ARV), and on thin-margin deals that cap usually decides the loan.
- Up to 100% of the documented rehab budget can fund in draws against completed work, within the overall loan limit.
- Closing costs are paid in cash, not rolled into the loan.
- All figures vary by lender, property, and experience, and nothing here is a commitment to lend.
What Does It Mean to Count Rehab Costs in the Loan?
Counting rehab means the lender treats your renovation budget as part of the cost it lends against. It does not mean you receive that money on day one.
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.
Most investors first see this in an advertisement promising to fund the rehab. That phrase describes the renovation line, not the whole project. The purchase price and the rehab budget together make up project cost. The lender then lends a percentage of that total.
Wealthfit defines loan-to-cost as the loan divided by purchase price plus rehab budget. It also points out that this measure ignores the finished value of the property. That gap is exactly why a second test exists.
Lendmire arranges these loans through a network of private and hard money lenders. This article explains the mechanics those lenders use, so you can size a deal before you ever submit it.
Key Terms Defined
Project cost: The purchase price plus the documented rehab budget. Closing costs and reserves sit outside this figure.
Loan-to-cost (LTC): The loan amount divided by project cost. It is the first of the two sizing tests.
After-repair value (ARV): The estimated value of the property once renovations are finished, built from recent sales of renovated nearby homes. Motley Fool’s ARV explainer describes it the same way.
Holdback: The part of the loan reserved for rehab. It is not paid at closing.
Draw: A release of holdback funds after the lender verifies that a phase of work is complete.
Scope of work (SOW): The itemized rehab budget, broken out by area and trade, that the lender reviews and later draws against.
How Underwriting Treats Rehab, Step by Step
The process follows a fixed order. Each step feeds the next, so a weak input early on shrinks the loan later.
1. You submit the deal. The package usually includes the purchase contract, a detailed rehab budget, comparable sales supporting your ARV, a financial statement, and proof of reserves.
2. The lender reviews the scope of work. Many lenders supply their own template. Investors on BiggerPockets note that lenders want the budget itemized because draws are tied to those line items.
3. Valuation sets ARV. An appraiser or broker price opinion estimates the finished value from renovated comparables. This number controls the cap.
4. The lender runs both tests. It multiplies your tier percentage by purchase plus rehab. It also multiplies 75% by ARV. The smaller figure is the maximum loan.
5. Closing splits the loan in two. The purchase portion funds at closing. The rehab portion goes into the holdback.
6. Draws release the holdback. Each draw follows an inspection and supporting paperwork.
Borrowers often shop the highest advertised tier percentage and never test the cap, even though the lower of the two limits is what controls the file.
The Two Tests, With Numbers
The cost test and the value test pull in different directions. The table below expresses everything as a percentage of ARV. These are modeled assumptions, not market data.
| Scenario | Total cost | Tier | Cost test | Governs |
|---|---|---|---|---|
| A | 70% of ARV | 93% | 65.1% of ARV | Cost test |
| B | 72% of ARV | 85% | 61.2% of ARV | Cost test |
| C | Close to ARV | 93% | Above the cap | 75% ARV cap |
| D | Close to ARV | 85% | Above the cap | 75% ARV cap |
In Scenarios A and B, the cost test produces the lower loan, so it governs and the cap never comes into play. The borrower still funds the gap between total cost and the loan, plus closing costs.
Scenarios C and D are the ones that surprise people. When all-in cost sits close to ARV, even an 85% tier implies a loan above the 75% cap. The cap overrides it, and the borrower covers the rest. In both, the experience tier barely matters, because the value cap binds first.
The practical lesson is simple. A thin gap between all-in cost and ARV blocks full financing, whatever the headline percentage says. Investors who underwrite on the advertised tier alone tend to arrive at the closing table short on cash.
When the ARV Cap Squeezes the Rehab Line
The cap does not trim the purchase price or the rehab budget separately. It limits the total loan. In effect, the rehab line gets squeezed because the purchase portion funds first at closing.
Run the numbers on a deal where cost sits near ARV and the cap holds the loan to 75% of ARV. The borrower brings the difference. That cash must show up as down payment and as front-loaded rehab spending. The holdback only releases after work is done.
Three things make this worse:
- A low ARV. If the valuation comes in under your estimate, the cap drops with it. Your cost does not drop, so your cash requirement rises.
- A larger scope. Adding rehab raises project cost, but the cap stays tied to value. Past a certain point, extra scope adds cash you must bring, not loan.
- An unsupported ARV. Comps that lean on unrenovated sales or distant sales invite a lower number.
This is also why the formula some investors use for quick screening differs from lender sizing. The Fool page describes a 70% rule for setting a maximum purchase price, which is an investor’s rule of thumb. It is not a lender’s loan formula, and the two should not be confused.
What Funds at Closing and What Waits
The loan is one commitment but two pools of money. Here is how they differ.
| Item | At closing | In holdback |
|---|---|---|
| Purchase portion | Funded | No |
| Rehab portion | Not paid | Released in draws |
| Closing costs | Paid in cash | No |
| Reserves | Borrower funds | No |
The leverage tiers describe purchase plus rehab. They do not cover closing costs or reserves. This is one of the most common misreadings of a term sheet.
How draws work
Funds are usually released in four to six draws. Each release follows verification: an inspection, contractor invoices, an updated percent-complete schedule, and lien waivers. Many lenders hold back a small contingency reserve, released at project close-out.
Two points deserve emphasis. First, the inspector confirms that the work exists. That is not a code or permit sign-off, so permits remain your responsibility. Second, every lender writes its own draw rules, and there is no industry standard. Draw count, inspection cadence, and how interest accrues on undrawn funds all change your real carry cost.
How the Lender Vets Your Rehab Number
The lender does not simply accept your budget. It reviews it, and a vague budget slows the file.
A strong scope of work is itemized by area and trade. It matches the work shown in photos and the purchase contract. It includes a realistic contingency line. In a BiggerPockets thread on financing renovations, a commenter notes that a draw request has to match the cost listed on the scope of work. That is why a loose budget causes trouble later: each draw gets measured against it.
A padded budget causes a different problem. If the lender thinks line items are inflated, it can question the number or reduce what it counts. A budget that is too thin can leave you without funds when costs rise. The best files sit in the middle: detailed, supportable, and tied to comps that show why the work earns its value.
Work already completed before closing generally is not part of the rehab line. The same goes for your own unpaid labor. Plan on documented, forward-looking costs.
Structures and Variations
The tier math above applies to fix-and-flip loans. Other structures size differently.
| Program type | Typical sizing |
|---|---|
| Fix-and-flip | 85-93% of project cost, 75% of ARV cap |
| Bridge, no rehab | Up to 80% of purchase price |
| Cash-out or rate-term refinance | Up to 65% of value |
| Ground-up construction | Up to 90% of cost, 75% of completed value |
Ground-up construction at the 90% and 75% levels is reserved for builders with 3 or more completed projects. The top tier on any program is reserved for experienced investors. Loan amounts run up to $5,000,000, larger by exception, and terms run 6 to 18 months, interest-only, with no prepayment penalty. These are network parameters. They vary by lender, property, and experience.
Property type matters too. The collateral is non-owner-occupied residential property of 1-4 units, with ground-up construction to 10 units. Commercial, industrial, land, and owner-occupied properties are not offered. Credit is reviewed at a 620 minimum, with additional conditions below 660, though underwriting stays centered on the property, the plan, and the exit.
Where the General Rule Breaks
Five edge cases account for most of the cash surprises.
A low appraisal. The cap falls with ARV. You fund the difference, or you renegotiate or rescope the project.
Reimbursement timing. Draws are not advances. You need working capital beyond your down payment.
Draw fees. Some lenders charge per draw or per inspection, and posters in one BiggerPockets discussion on draw fees report amounts in the low hundreds of dollars each. Those are anecdotes, not network terms, but they show why a six-draw schedule costs more than a three-draw one.
Budget overruns. The loan is sized on the approved budget. If costs climb, the lender may or may not recut the holdback, so build a contingency line into the original scope.
A thin spread with a higher tier. Moving from 85% to 93% of cost looks like a large gain. When the cap already binds, as in Scenario D above, it adds nothing.
One contrast helps investors who also hold rentals. A DSCR rental loan funds as a lump sum at closing on a property that is already stabilized, and it does not count a rehab budget. A hard money loan pays rehab in draws. Many investors refinance out of hard money into long-term DSCR financing once the property is renovated and rented, and Lendmire brokers that path. Keep that exit in view when you size the rehab loan, and see the complete DSCR loans guide for how that stage works.
What the Decision Looks Like in Practice
Your cash requirement has four parts: the gap between total cost and the loan, closing costs, reserves, and working capital to front each phase.
Picture an investor with three completed projects looking at a deal where cost runs close to ARV. The 90% tier looks attractive on paper. The cap says otherwise. That investor needs to either negotiate the price down, trim the scope, or bring more cash. The loan type is not the problem. The deal’s margin is.
Now consider a deal with a wide spread. Cost sits well under ARV, the cost test governs, and the experience tier directly sets the loan. For this investor, moving up a tier by completing more projects has real value.
Experience matters, but margin matters more. A newer investor on a fat-margin deal can fund more of the project than a seasoned investor on a thin one.
A pre-call checklist
Before you contact any lender, confirm these items:
- Your purchase price and total itemized rehab budget.
- Renovated comps that support your ARV, drawn from recent nearby sales.
- Both tests run on paper, using your tier and the 75% cap.
- Cash on hand for the gap, closing costs, reserves, and early rehab spending.
- Your count of completed projects, with documentation.
- Your exit plan, whether a sale or a refinance into rental financing.
If the cap binds, fix the deal before you fix the lender.
Frequently Asked Questions
Is the rehab budget included in my hard money loan amount?
Yes, it is part of project cost, which the lender uses to size the loan. The loan is then limited by the 75% ARV cap. The rehab portion funds through draws instead of at closing.
Do I get the rehab money at closing?
No. The purchase portion funds at closing, and the rehab portion sits in a holdback. Funds release in draws after inspections and documentation, usually in four to six draws, though every lender sets its own rules.
Does ARV limit how much rehab money I can borrow?
Yes, indirectly. The cap applies to the total loan, so a high rehab budget on a low-ARV deal shifts more of the cost to you. A rehab line can be fully funded only if the total stays within both tests.
Can rehab funds cover closing costs?
No. Closing costs are paid in cash, and the leverage tiers describe purchase plus rehab only. Plan for those costs, plus reserves, as separate cash needs.
What happens if my appraisal comes in low?
The maximum loan drops with the ARV, and you cover the difference. You can bring more cash, negotiate the purchase price, or reduce the scope. Terms and options vary by lender, property, and experience.
Next Steps
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. Its hard money programs are available across 41 markets, including Washington, D.C., through select lenders in its network. Every file is underwritten individually, and nothing here is a commitment to lend.
The investors who finish rehab projects with cash to spare are usually the ones who ran the ARV cap before they made an offer, not after.
About Lendmire
As a DSCR and non-QM mortgage broker, Lendmire — NMLS# 2371349 — connects investors with wholesale lending channels across 41 markets, including Washington, D.C. The property’s rental income, not the borrower’s traditional personal-income documentation, is central to lender review, which works for self-employed operators and portfolios beyond four financed properties. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.
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References
1. Wealthfit – After Repair Value
3. BiggerPockets – What do lenders actually want to see in a rehab budget
4. BiggerPockets – Financing renovations
5. BiggerPockets – Draw fees while rehabbing with hard money
This article is part of Lendmire’s hard money loan program — full qualification details, guidelines, and scenarios live on the program page.
Related reading: How Rehab Scope Changes the Contingency a Hard Money Loan Needs · How a Hard Money Lender Counts a Seller-Financed Down Payment · How a Hard Money Lender Counts Seasoning on 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.