Rehab landed 18k over budget, so the refinance won't pay off the hard money

Question

Numbers first. Bought at 145k, budgeted 55k on the rehab, actual spend landed at 73k. Most of that was a sewer lateral nobody caught and a roof that went from patch to full tear-off. My hard money is 80% of purchase plus 100% of approved rehab draws, so payoff is sitting around 218k with the accrued interest and the exit fee.

ARV I underwrote was 285k. At 75% cash-out LTV that's 213,750, and then closing costs come off that. So even if the appraisal hits my number exactly I'm short roughly 8k against the payoff, plus whatever the new lender wants in escrow.

Options I see: bring the 8k plus costs to the table, extend the hard money at 2 points and keep paying interest while I chase a higher appraisal, or refi at a lower amount and carry a second. The extension is the one I like least because I'm already paying on 218k.

What I want to know from people who've been here: is there a version of this where the new loan is treated as rate-and-term instead of cash-out, and does that actually buy me LTV headroom? I've had two brokers give me opposite answers.

Rena Expert · Accepted Answer

The rate-and-term question is real and the two brokers are probably both describing their own lender's overlay rather than a universal rule. The general mechanism: a refinance that only pays off debt used to acquire and improve the property, plus normal closing costs, is often underwritten as rate-and-term rather than cash-out, and rate-and-term usually allows a higher LTV than cash-out on the same product. Whether your specific hard money payoff qualifies depends on that lender's documentation requirements, how the original loan was recorded, and how long you've held title. Get the answer in writing from the actual underwriter before you spend money on an appraisal, because a broker's verbal read is worth nothing at the closing table.

Even if it works, run the case where it doesn't. You're 8k short against a 285k appraisal that hasn't happened yet. Appraisals on renovated properties in the 250k to 300k band routinely land 3 to 8 percent off an operator's number, and at 270k your 75% is 202,500 and the gap becomes 15k or worse. Price the extension now so you know what a second appraisal round costs you in carry, because deciding that under time pressure is how people take a bad payoff.

The piece you haven't mentioned is reserves. Most DSCR and portfolio lenders want several months of PITIA in verified funds at closing, and that money is separate from the shortfall you're already funding. If your liquidity after this deal is thin, the refi can technically close and still leave you unable to start the next one, which is the outcome that actually breaks the cycle. Also check whether the new loan carries a prepayment penalty, since a three-year step-down changes what you can do with this property later.

aaron_fitz10 · Answer

Genuinely asking, because I'm trying to work out whether this strategy fits me at all. Was the 18k overrun the sewer and roof, or was the sewer and roof 18k and the rest of the budget also drifted? I ask because everyone tells me to hold 15% contingency and 55k plus 15% is only about 63k, which still wouldn't have covered you.

marcus_hale41 · Answer

Price the extension in dollars per week and put it next to the shortfall. If the hard money is 12% on 218k that's roughly 2,180 a month before the 2 points, so a two-month extension chasing an appraisal is something like 8,700 all in. That's more than the gap you're trying to close. I'd fund the 8k and be done, assuming you have it without touching reserves.

Separately, harrow, did the sewer lateral show on any inspection or was the line only scoped after purchase? That's the part I'd want to fix in my process, not the financing.

Rehab landed 18k over budget, so the refinance won't pay off the hard money

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