When the Scope Changes: What It Does to Your Rehab Loan

A change order does not automatically change your loan. If the new scope costs more, the extra usually comes out of your pocket unless the lender agrees to resize. If it costs less, the unused rehab money typically stays undrawn. Either way, the change can affect your cash, your timeline and your profit.

Editor's note: this article covers the financial impact. A companion piece, "The Change Order Process: Paperwork That Keeps Draws Flowing," covers how to document and submit one.

Your loan was sized to the original plan

At closing, the lender set the loan amount using the purchase price, the approved rehab budget and the after-repair value (ARV). Those numbers produce your loan-to-cost (LTC) and loan-to-ARV ratios. On RSC Private Lending's Fix & Flip loans, the limits are up to 95% LTV on the purchase, 100% of rehab, 95% of total cost and 75% of ARV. A bigger budget does not stretch the loan by itself. The lender would have to re-underwrite to fund more.

When costs go up

Expect to cover the increase with your own cash in most cases. Some lenders may consider a modest increase if the deal still fits their leverage limits, especially when the extra work raises the ARV. That is a case-by-case decision, not a given.

Example (illustrative only): Your approved rehab budget is $60,000. The electrical turns out to need a full rewire, adding $10,000. If the loan stays the same, you fund the $10,000. If you had planned a $5,000 contingency, you still need to find another $5,000. That is why contingency matters.

When costs go down

If you cut a line item or come in under budget, your total project cost drops. Undrawn rehab funds generally are not handed to you as cash. They simply are not borrowed. On some loans, that lowers what you owe and the interest you pay. Check how your loan charges interest, because some loans charge on the full commitment instead of only the drawn balance.

The hidden costs of a change

The dollar amount on the change order is only part of it. Also think about:

• Time. New work can add weeks, and each week adds interest, insurance and utilities.
• Maturity. If the delay pushes you near the loan's end date, you may need an extension, which many lenders charge for.
• Margin. An upgrade only pays if buyers will pay more for it.
• Permits. Some changes trigger new permits or inspections.

Ask before you upgrade

Unplanned repairs are hard to avoid. Upgrades are a choice. Before adding one, check whether comps support a higher sale price. If they do not, the upgrade is just a cost.

What this means for you

Budget a real contingency, expect to fund overruns yourself, and weigh every upgrade against what it adds to resale. Talk to your lender early when the scope moves.

Facing a scope change on a current project? Call RSC Private Lending at (832) 648-4619 or email info@rscprivatelending.com to talk it through. All loans are business-purpose and subject to underwriting.