The money for the renovation is not handed over at closing. It sits with the lender and comes out in stages as the work gets done. That single structural fact drives most of the cash planning on a rehab project, and it is the part first time borrowers are least prepared for. Here is how the mechanism actually works.
Why the money is held back
A rehab loan is underwritten against two values: what the property is worth today and what it will be worth when a specific scope of work is finished. The lender advances against today’s value at closing. The rest of the loan is secured by value that does not exist yet.
A holdback is how a lender lends against that future value safely. The renovation funds are committed and reserved, then released as the work that creates the value is actually completed. It protects the lender from funding a project that stops halfway, and it protects the borrower from a loan that was never really sized to finish the job.
The parts of the structure
The initial advance. Funded at closing against the as-is value or purchase price. This buys the property.
The holdback. The renovation budget, reserved by the lender. On our fix and flip program the total of both parts is sized against the published tests of 85% of the purchase, 100% of the rehab and 75% of ARV, with the tightest result applying.
The approved budget. A line by line schedule of the work, with costs, agreed before closing. This is the document every draw is measured against, so it is worth getting right rather than getting fast.
How much of the renovation the holdback covers is a published term rather than a mystery. Our fix and flip program publishes a construction holdback of up to 100% of the rehab. Read that alongside the other tests: the holdback describes how much of the renovation line can be financed, while 85% of the purchase and 75% of the after repair value still cap the total loan.
The draw schedule. How many releases, what triggers each and what documentation is required.
Inspections. Verification that the work claimed has been done, usually by a third party. On larger or ground-up files this can extend to fund control, where a third party administers disbursement directly.
How a draw actually happens
The sequence is the same almost everywhere.
You complete a portion of the work. You submit a draw request identifying which approved budget lines are complete and to what percentage, with invoices, lien releases where required and photographs. An inspector visits or reviews the evidence and confirms the completion. The lender approves the amount and funds it, usually by wire.
Two things follow from that order. First, you fund the work before you are reimbursed, so every draw cycle is a period where your own cash is in the project. Second, the request is measured against the approved budget, not against what you actually spent. Work outside the approved scope does not draw, which is why change orders have to be approved rather than explained afterward.
Interest and the draw schedule
Ask one question on every term sheet: is interest charged on the full loan amount or only on the funds drawn.
If interest accrues only on funds drawn, the carry starts small and grows as the project progresses, which matches reality. If it accrues on the full facility from day one, you are paying for money you have not received, an arrangement known as Dutch interest. On an eighteen month term with a large renovation budget, the difference between those two structures is worth more than a meaningful move in rate.
Our fix and flip and ground-up construction programs both publish non-Dutch interest calculated on the drawing balance, so the carry follows the money actually released. Ask every lender the same question in those words and compare the answers.
A related structure is an interest reserve, where part of the loan is set aside to make the payments during construction. It reduces the cash you need each month and it increases the loan, so it is a trade rather than a gift. Ask whether one is available and what it costs.
What slows draws down
An incomplete request. Missing invoices, photos that do not show the claimed work, or a request that does not map to the approved budget lines.
Work done out of sequence. Finishing tasks from a later stage while earlier ones remain open. The schedule is a schedule.
Unapproved changes. A better layout, a different material, an extra bathroom. If it is not in the approved budget, it does not draw until it has been approved.
Lien exposure. Unpaid subcontractors and missing releases. A recorded mechanic’s lien is a title problem as well as a payment problem, and it stops a draw cold.
Scheduling. The inspection has to happen. Requesting draws on a predictable cadence and giving good notice does more for your timeline than chasing does.
Planning your cash around it
Three habits separate the projects that run smoothly.
Size your working capital for one full draw cycle, not for zero. You need enough liquid cash to pay the contractor and carry the property between the invoice and the reimbursement, every time.
Keep the contingency outside the loan. The holdback is fixed at the approved budget. An overrun does not enlarge it, and the money has to come from somewhere. Our post on how much money you need to flip a house sets out all four cash needs.
Front load the work that creates the most verifiable value. Completed, inspectable stages release money. Half-finished work across six rooms does not.
Draws on ground-up construction
The same mechanism, with more of it. A ground-up construction loan funds land or existing basis at closing and then releases hard and soft costs through a longer schedule tied to construction milestones. Our construction program publishes LTC up to 80% and terms of 12 to 18 months, with a minimum FICO of 600 and two prior ground-up projects.
Expect more formal fund control, more documentation per draw and a budget with a contingency line the lender expects to see. Our post on building a construction budget a lender funds covers how that document is assembled.
Before you close
Get the draw terms in writing. How many draws, what triggers each, who inspects, how long funding takes, what documentation is required, what a change order process looks like and whether interest accrues on the full amount or on funds drawn.
A lender who answers those clearly is a lender whose draws will work. The fix and flip financing guide covers the structure end to end, and (619) 617-2797 or the borrow page will get your specific budget reviewed before you commit to it.
