The Quick Read: Until you have owned the property long enough, the lender sizes your new loan on what you actually invested, not on what the appraiser says it is worth. Cost basis means your purchase price plus documented rehab spending. Once the lender’s ownership window passes, the appraisal takes over as the cap.
- Cost basis is purchase price plus rehab you can prove with paid invoices.
- Inside the seasoning window, the loan is capped at the lesser of basis or appraised value.
- A new loan that only repays the hard money note is treated differently from one that puts cash in your pocket.
- Rent coverage is a separate test. Strong rent does not waive seasoning.
- Your hard money maturity has to outlast the clock, or the exit gets expensive.
Across the wholesale network Lendmire works with, this is a common reason a flip or BRRRR exit produces less cash than the investor modeled. The investor priced the deal on after-repair value (ARV). The lender sized it on cost.
Which “Hard Money Cash-Out Refinance” Do You Mean?
The phrase covers two different transactions, and they follow different rules. One is a hard money lender refinancing its own short-term loan. The other is an exit into longer-term rental financing, usually a DSCR loan, that pays off the hard money note.
| Factor | Hard money refinance | Exit into DSCR loan |
|---|---|---|
| Purpose | Extend or reset a short-term loan | Move into long-term rental debt |
| Cash-out leverage | Up to 65% of value | Around 75% LTV on standard rentals |
| Term | 6-18 months, interest-only | 30-year fixed is the spine |
| Sizing basis | Value, plus project facts | Cost basis early, appraisal after seasoning |
The hard money figure is a typical ceiling that varies by lender, property, and experience. The DSCR figure is a typical network ceiling, subject to lender guidelines. This article focuses on the second path, because that is where cost-basis sizing bites hardest.
DSCR stands for debt service coverage ratio. It compares the property’s monthly rent to its monthly payment of principal, interest, taxes, insurance, and association dues (PITIA). The lender’s loan-to-value cap (LTV) is the loan as a percentage of the value it uses. Both tests matter, and each one can stop a file on its own.
How Underwriting Treats Cost Basis, Step by Step
Underwriters work through a fixed sequence. Each step either confirms the file or changes the loan amount. Here is how that sequence typically runs.
1. Classify the transaction
A new loan that covers only the hard money payoff, accrued interest, exit fees, and closing costs is generally treated as rate-and-term. Any cash back to you makes it a cash-out. Cash-out brings the lower leverage cap, the seasoning rules, and the reserve rules.
2. Start the seasoning clock
Seasoning is the waiting period between buying a property and refinancing it on current value. The clock typically runs from the recorded deed or title date. It does not run from the day the hard money loan funded or the day the rehab finished. The title search or commitment is the usual proof.
Across the network, about six months is the common expectation for a cash-out refinance. Individual lenders differ, so confirm the specific program before you plan around it.
3. Pick the value basis
Inside the window, the lender caps the loan at the lesser of the appraisal or your cost basis. After the window, the appraisal drives sizing. This is a risk control. The lender does not yet trust that your rehab created value the market will confirm.
Forced appreciation can also be discounted after the window. Some lenders still hold a file to basis when they do not recognize the rehab value.
4. Document the basis
A cost basis is only as good as its paper trail. Typical files carry these items:
- The settlement statement from the original purchase.
- The deed or title record showing the ownership date.
- The rehab budget and draw history from the hard money lender.
- Receipts, invoices, and proof of contractor payments.
- Permits and inspection records where work required them.
Rehab spending that cannot be tied to a paid invoice usually does not count. Underwriters are not doubting you. They simply cannot add an undocumented number to a basis.
5. Order the appraisal
The appraiser gives an opinion of value. For a single-family rental, that is the standard single-family appraisal form with a rent schedule. Small multifamily uses the 1025 operating income form. While seasoning is unmet, the lender takes the lower of the appraisal or the basis cap. A high appraisal does not raise the loan in that case. A low appraisal still lowers it.
6. Run the coverage test separately
The DSCR test looks only at rent against PITIA. It does not care how long you have owned the property. It also does not care how much you spent. Strong rent does not waive seasoning, and a fully seasoned property still fails if rent falls short.
Lease and deposit paperwork is a common stall point at this stage. A signed lease, deposit verification, and proof of first month’s rent keep the file moving.
One more caution. Clearing 1.00 on coverage is not the same as positive cash flow. Repairs, vacancy, management, utilities, and capital expenses sit outside the calculation.
7. Size the loan and compute net proceeds
The loan is the lesser of the leverage cap applied to the right value, or any coverage-limited amount. Net cash to you is the loan minus the hard money payoff, minus closing costs. The payoff grows every month, because interest and fees keep accruing on the note. Waiting erodes proceeds.
What Counts Toward Cost Basis
Lenders do not all treat these items alike. The table shows how most underwriters lean, but a lender’s guidelines control.
| Item | Typical treatment | Proof needed |
|---|---|---|
| Purchase price | Counts | Settlement statement |
| Paid rehab work | Counts | Invoices and payment proof |
| Permits for that work | Usually counts | Permit records |
| Original closing costs | Varies by lender | Settlement statement |
| Bridge interest and points | Varies by lender | Payoff and draw ledger |
| Owner labor | Rarely counts | Hard to prove |
| Unpaid or undocumented work | Does not count | None |
The “varies” rows are where files get argued. Ask early which lines a program will accept, before you assemble the package.
Two situations deserve a flag. A purchase that was not at arm’s length, such as a sale between related parties, invites extra scrutiny of the price itself. A wholesale assignment fee embedded in the purchase price also draws questions. Both can change what the underwriter accepts as the real starting number.
A Worked Example in Index Units
These numbers are index points, not dollars. They are modeled assumptions, meant only to show the logic. Real files vary by lender, property, and borrower.
- Cost basis: 70.
- Hard money payoff, including interest and fees: 60.
- Closing costs: 3.
- Leverage cap: 75%.
The cost-based loan is 75% of 70, or 52.5. The payoff plus costs total 63. The loan falls 10.5 short, so you would need to bring that gap in cash to close.
- Appraised value: 100.
- Same payoff and costs: 63.
Now the loan is 75% of 100, or 75. After the 63 for payoff and costs, you keep 12 in cash-out proceeds. Same property, same debt, very different result.
The break-even test. A cost-based loan clears the payoff only when basis times the leverage cap is at least the payoff plus costs. With these inputs, 63 divided by 0.75 means basis must reach 84. Run this before you sign the hard money note, not after.
Short-term rental collateral is capped lower. The cash-out ceiling on short-term-rental collateral is 70%, against 75% on standard rentals.
Where the General Rule Breaks
The seasoning rule has named exceptions, and they matter because investors misapply them.
Delayed financing. This is an exception built for cash buyers. The Fannie Mae Selling Guide section on cash-out refinance transactions describes a delayed financing exception that sits on top of the other cash-out requirements, with cash-out pricing still applying. Agency rules do not govern DSCR loans, so treat this as contrast only. The logic is the useful part: the exception returns your documented purchase money, not a share of new appraised value.
Why it usually fails for hard money buyers. The exception assumes no financing at purchase. A hard money lien recorded from day one generally breaks that condition. One third-party loan review exhibit filed with the SEC shows a non-QM guideline that does tolerate a short-term or hard money loan, but only if the new loan pays it off. That guideline asks for a copy of the note and sources of funds. It caps the new loan at documented investment plus financed closing costs. It also treats the loan as cash-out for eligibility.
The same exhibit quotes other narrow exceptions, including inheritance and legal awards. These exhibits are redacted and lender-specific. They prove such rules exist. They do not describe an industry standard.
If a loan does not meet the narrow exception, the lender falls back to its ordinary cash-out seasoning rules, or to rate-and-term treatment if the loan is reviewed as one.
Low appraisals. If value comes in far below cost, the lender takes the lower number. Your rehab may not have been priced the way the market sees it.
Mixed lender policies. Some programs have shorter seasoning, a few have none, and the strictest want more. Lender-specific variation is real, which is why shopping a file across several programs matters.
What to Do If You Are Inside the Window
You have several exits when the hard money note matures before the clock clears. Each trades cost against time. Lendmire’s piece Hard Money Cash-Out Refinance Lenders That Lend on Cost Basis Instead of Appraised Value covers how these programs differ in more detail.
| Option | What it does | Trade-off |
|---|---|---|
| Payoff-only refinance now | Retires the note, no cash back | You wait for equity |
| Extend the hard money note | Buys time to season | Added interest and fees |
| Bring cash to close | Covers the cost-based gap | Ties up your capital |
| Wait, then cash out | Sizes on appraised value | Payoff keeps growing |
| Sell | Ends the hold | Gives up the rental |
Many investors choose a payoff-only refinance now and a cash-out later. That sequence can work when the property is leased and stabilized. It also depends on the lender’s rules for a later cash-out, so ask about that before you start. Many investors refinance out of hard money into long-term DSCR financing once a property is stabilized, and Lendmire brokers that path.
The bigger planning point is maturity. Hard money terms typically run 6 to 18 months, interest-only, with no prepayment penalty, and varying by lender, property, and experience. Your note has to outlast the rehab, the lease-up, the seasoning window, the appraisal, and underwriting. If it does not, the extension or the cash gap becomes your cost.
Qualifying on the Coverage Side
Cost basis is the equity test. Coverage is the income test. The strongest files clear both.
Here is how the network typically frames it for a DSCR cash-out. These are typical ranges, subject to lender guidelines, and every file is underwritten individually:
- Leverage tops out around 75% LTV on a cash-out refinance of a standard rental.
- Credit scores of about 660 are what most programs want. Some programs start at 620, and 700 and above opens the strongest tiers.
- Coverage of 1.00 is where select programs start. Stronger ratios open better pricing and leverage. A separate select-lender path takes coverage below 1.00, with leverage and terms adjusted.
- Reserves are commonly around 6 months of PITIA. They vary by lender, leverage, loan size, and transaction type.
A larger cash contribution can lift coverage by shrinking the loan. It never erases a leverage cap, credit floor, or reserve rule. The complete DSCR loans guide walks through how these pieces fit together. Lendmire’s article Can You Get Approved for a Hard Money Cash-Out Refinance When Lenders Use Cost Basis? takes the approval question head on.
Key Terms Defined
Cost basis: Your purchase price plus the rehab spending you can document with paid invoices.
Seasoning: The waiting period a lender requires between acquiring a property and refinancing it on appraised value.
Rate-and-term refinance: A refinance that repays existing debt and costs without putting cash in your hands.
Cash-out refinance: A refinance that gives you cash beyond the payoff, so it carries stricter leverage and seasoning rules.
ARV (after-repair value): The estimated value of the property once the rehab is finished.
Loan-to-cost: The loan as a percentage of project cost rather than appraised value.
PITIA: Principal, interest, taxes, insurance, and association dues, the monthly payment the DSCR test measures rent against.
Frequently Asked Questions
Is my hard money payoff treated as a cash-out?
Only if cash comes back to you. A new loan that repays the note, accrued interest, exit fees, and closing costs is generally treated as rate-and-term. Once any cash goes to you at closing, the lender treats it as a cash-out. That change brings the lower leverage cap, seasoning rules, and reserve rules.
Does a higher appraisal mean more cash?
Not inside the seasoning window. The lender takes the lesser of the appraisal or your cost basis, so a strong appraisal cannot lift the loan above basis. After the window clears, the appraisal drives the loan amount, subject to the leverage cap and the rent coverage test.
When does the seasoning clock start?
It typically starts at the recorded deed or title date. It does not start at hard money funding or when rehab finishes. A title search is the usual evidence.
What if my cost basis is below my payoff?
Then a cost-based loan cannot retire the note on its own, and you need another path. Options include bringing cash to close, extending the hard money note until seasoning clears, or selling. Run the break-even math early: basis times the leverage cap must reach payoff plus closing costs.
Do bridge interest and points count toward cost basis?
It varies by lender. Rehab with paid invoices is the safest item. Financing costs and original closing costs are accepted by some programs and excluded by others. Ask for the program’s treatment in writing before you count on them.
About Lendmire
Lendmire (NMLS# 2371349), a non-QM mortgage broker serving investors in 41 markets including Washington, D.C., helps structure DSCR scenarios commonly evaluated around a property’s rental income rather than personal income paperwork, subject to lender guidelines. A Scotsman Guide Top Mortgage Workplace in 2025 and 2026, Lendmire places loans through wholesale investor lenders and is not a direct lender.
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References
1. Fannie Mae Selling Guide, cash-out refinance transactions
2. SEC filing: third-party loan review exhibit on non-QM guidelines
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 Get Approved for a DSCR Cash-Out Refinance Instead of a Home Equity Investment? · How to Qualify and Apply for a Super Jumbo DSCR Cash-Out Refinance With 90% Rent Coverage
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
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Compliance and disclosures. Lendmire (NMLS# 2371349) is a licensed mortgage broker and is not a direct lender, depository institution, financial advisor, or tax professional. Content in this article is general market analysis and educational information — not financial, legal, or tax advice for any specific situation. Lendmire does not guarantee loan approval; every transaction is subject to underwriting by the funding lender. Mortgage pricing and loan program guidelines are subject to change at any time without notice and vary by borrower characteristics, property type, and state regulations. Lendmire complies with Equal Housing Opportunity. Licensure verification: NMLS Consumer Access.