Lending Terms Every House Flipper Should Know

Diving into house flipping can be exciting—but also financially risky if you don’t understand the language lenders use. Whether you’re about to flip a house for the first time or exploring fix-and-flip loans for beginners, understanding key lending terms is essential.

Misinterpreting even one term can lead to delays, higher costs, or deals falling through. A clear grasp of these concepts gives new real estate investors the confidence to negotiate better, structure smarter deals, and make informed financial decisions.

This beginner-friendly glossary is designed to help anyone interested in real estate investment build a strong foundation before closing their first deal.

Basic lending terms for real estate investors

These are the most common lending terms you’ll encounter when seeking a loan for a fix-and-flip project.

• Loan-to-value ratio (LTV): LTV represents the percentage of the property’s value that a lender is willing to finance. For example, if a property is worth $200,000 and the lender offers 80% LTV, they’ll finance $160,000. Understanding LTV helps you know how much cash you’ll need upfront.
• After repair value (ARV): ARV is the estimated value of a property after renovations. Lenders use ARV to determine how much they’re willing to fund. Accurate ARV calculations are crucial for profitable house flipping.
• Hard money loan: This short-term, asset-based loan is popular among real estate investors. Hard money loans are typically quicker to secure than traditional financing but come with higher interest rates and shorter repayment periods.
• Bridge loan: A bridge loan provides short-term funding to bridge the gap between purchasing a property and securing long-term financing or selling it after renovation.
• Private money lender: These are individuals or small groups that lend their own capital for real estate investment projects. They often offer more flexible terms than banks and can close deals faster.
• Points (in lending): Points are upfront fees paid to the lender, calculated as a percentage of the loan amount. For example, 2 points on a $100,000 loan equals $2,000.
• Interest-only loan: With this loan structure, borrowers pay only the interest for a set period. It can help keep initial payments low, freeing up capital for renovation expenses.
• Balloon payment: Some loans require a large, lump-sum payment at the end of the term. This balloon payment can be manageable if the property is sold or refinanced before it comes due.
• Draw schedule: A draw schedule outlines when renovation funds are released during the rehab process. It helps keep projects funded in phases rather than receiving all the money upfront.
• Escrow: An escrow account holds funds—such as earnest money or closing costs—until certain conditions are met. It ensures both buyer and seller are protected during the transaction.
• Closing costs: These are the fees associated with finalizing a real estate transaction, including title fees, appraisals, loan origination fees, and more. Budgeting for closing costs is crucial in every fix-and-flip deal.
• Prepayment penalty: Some loans charge a penalty if you pay off the balance early. Be aware of these fees, especially if your plan is to sell the property quickly.
• Origination fee: This is a fee charged by the lender for processing a loan application. It’s usually a percentage of the total loan amount.
• Underwriting: Underwriting is the process lenders use to assess the risk of a loan. Traditional lenders typically review your credit, income, and the property’s value. However, some hard- money lenders take a different approach. They may focus more on the property itself or its income potential (known as net operating income, or NOI) rather than your personal financial profile.
• Refinancing (cash-out refi): Refinancing lets you replace your existing loan with a new one, often with better terms. A cash-out refi allows you to pull equity out of the property—potentially funding your next investment property.

Lending terms specific to flipping strategies

Understanding these terms can help you plan, fund, and execute a successful fix-and-flip strategy.

• Rehab budget: This is the total amount allocated for property repairs and upgrades. A realistic rehab budget is key to maintaining profitability.
• Scope of work (SOW): SOW outlines every renovation task to be completed. It helps keep contractors accountable and ensures lenders understand how their funds will be used.
• Proof of funds (POF): POF is documentation showing you have the financial ability to close a deal. Sellers often require it to take your offer seriously.
• Seasoning period: Some lenders require a property to be owned for a set amount of time before refinancing or reselling. This is known as the seasoning period and can affect your timeline.
• Gap funding: This financing covers the difference between what a primary loan provides and the total project cost. Gap funding can come from private lenders or personal capital.
• Title insurance: This protects you and the lender against issues with property ownership, such as undisclosed liens or title defects.
• Lien position: Lien position determines who gets paid first if the property is foreclosed. First-position liens are prioritized over second or third positions.
• Debt service coverage ratio (DSCR): This ratio compares a property’s income to its debt obligations. A higher DSCR shows lenders that the property generates enough cash flow to cover the loan payments.
• Adjustable-rate mortgage (ARM): An ARM has an interest rate that can change over time, usually after an initial fixed-rate period. It can offer lower starting payments but carries the risk of rate increases later.
• Exit strategy: Your exit strategy is how you plan to pay off the loan and profit from the investment—such as selling the property or refinancing. A clear exit strategy is critical to your overall success.

Know the lingo before you flip

Mastering these lending terms gives new investors the confidence to navigate financing with clarity and strategy. Whether you’re evaluating fix-and-flip loans for beginners, negotiating with lenders, or analyzing your exit strategy, understanding the language behind the numbers helps avoid costly mistakes.

Real estate success isn’t just about finding the right property—it’s also about making smart financial decisions. Continuous learning and connecting with experienced investors can sharpen your skills and improve your results.

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