How Construction and Rehab Draws Work on Hard Money Loans

What a draw is and why lenders use them

A draw is a scheduled release of loan money for construction or renovation work. Instead of handing you the entire rehab budget on closing day, a private lender keeps that money in a holdback (sometimes called a construction reserve or rehab escrow) and pays it out as the work gets done.

The logic is simple. On a fix & flip or ground-up loan, the lender is lending against what the property will be worth after the work, not just what it is worth today. If the money were released up front and the work never happened, the lender would be holding a loan larger than the as-is property supports. Releasing funds only after verified progress keeps the loan balance roughly in line with the value actually sitting in the ground.

Draws are not unique to hard money. Conventional renovation programs use the same idea. Fannie Mae’s Selling Guide describes renovation funds being held in a custodial account and disbursed as work is completed and inspected, and HUD’s 203(k) rehabilitation program uses a rehabilitation escrow with inspections before releases. Private lenders run faster, less formal versions of the same process.

If you are still deciding which loan type fits your project, our guide to fix & flip vs. bridge vs. construction loans explains which ones come with a draw schedule and which do not.

The holdback: how the rehab budget sits at closing

At closing, your loan is usually split into two buckets:

• Initial advance — the money that funds at closing, typically a percentage of the purchase price (or of the land cost on ground-up construction).
• Construction holdback — the rehab or build budget, held by the lender and released through draws.

The total of both buckets is your loan amount, and that total is what the lender checks against its leverage limits, such as a maximum loan-to-cost and a maximum percentage of after-repair value. If those terms are unfamiliar, see LTC vs. LTV vs. ARV.

Two points catch first-time borrowers off guard:

• Some lenders finance 100% of the rehab budget; others finance less. A lender might fund 90% of purchase and 100% of rehab, or 85% of purchase and 90% of rehab. If the holdback covers less than your full budget, you pay the difference out of pocket, and lenders often expect your share to be spent before or alongside their draws.
• The holdback is part of your loan even before it is drawn. Whether you pay interest on undrawn funds depends on whether the loan uses Dutch or non-Dutch interest, covered below and in detail in Dutch interest explained.

The draw schedule (scope of work and budget)

Before closing, almost every lender asks for a scope of work, sometimes called an SOW or construction budget. It lists each line item of work and its cost: demolition, framing, roofing, plumbing, electrical, HVAC, windows, drywall, cabinets, flooring, paint, landscaping and so on.

That budget becomes the basis of your draw schedule. Lenders structure it one of two common ways:

Line-item draws

Each budget line can be drawn on as it is completed or partially completed. If the inspector finds the roof 100% done and the electrical 50% done, you are eligible for the full roof line and half of the electrical line. This is flexible and common on rehab loans.

Milestone (phase) draws

The budget is grouped into phases, such as foundation, framing and dry-in, mechanical rough-ins, drywall, and final finishes, with a fixed dollar amount released when each phase is complete. This is more common on ground-up construction, where the build sequence is predictable.

Either way, write the budget realistically. An inflated line item will not survive the lender’s review or the appraiser’s cost check, and an understated one leaves you short later. A contingency line, often in the range of 5% to 15% of hard costs depending on the age and condition of the property, is a sensible cushion, though not every lender will fund it.

Step by step: how a draw request works

Lenders differ on details, but the sequence is close to universal.

1. Complete the work. Most private lenders release money for work already done, not work you are about to start.
2. Submit a draw request. This is usually a short form or portal entry listing the line items and percentages you are claiming, often with photos, invoices and lien waivers from contractors and suppliers.
3. Inspection. The lender sends a third-party inspector, or in some programs accepts a time-stamped photo or video inspection, to confirm that the claimed work is in place.
4. Review and approval. The lender compares the inspection to your budget and approves the full request, a partial amount, or nothing if the work does not match.
5. Funding. Approved funds are wired to you or, with some lenders, directly to your contractor, minus any draw fee.

A smooth draw might take only a few business days from request to wire. A draw with missing photos, an unclear budget or an inspector who cannot get access can take much longer. Ask each lender for its typical turnaround before you sign, because your contractor’s patience is part of your project schedule.

Reimbursement draws vs. advance draws

This is the single most important cash-flow question to ask a lender.

Reimbursement (arrears) draws

The most common model in private lending. You or your contractor pay for the work first, then the lender reimburses you after inspection. That means you need working capital to float each phase. If phase two costs $24,000, you need roughly $24,000 available (or a contractor willing to wait) before the lender pays you back.

Advance or upfront draws

Some lenders release a first draw at closing, or advance part of the next phase to cover materials and deposits. This is less common, often limited to a percentage of the budget, and sometimes priced higher or reserved for experienced borrowers.

Why it matters

A loan that finances 100% of rehab on a reimbursement basis still requires cash during the project. Many new investors budget for the down payment and closing costs but forget the float. Before you commit, estimate the largest single draw on your schedule and make sure you can cover it, plus a cushion. Our cash-to-close calculator handles closing costs, and the construction draw schedule calculator shows how much you may need to float between draws.

Inspections: what the inspector actually checks

A draw inspector is not a home inspector and is not judging the quality of your finish carpentry. Their job is narrower: confirm that the work you claimed is physically in place and estimate the percentage complete for each line item.

Typical things an inspector looks for:

• Whether materials are installed, not just delivered. Cabinets sitting in boxes in the garage usually do not count, although some lenders will fund stored materials with receipts.
• Whether rough-in work (plumbing, electrical, HVAC) is in place and, where relevant, whether the municipal rough-in inspection has been passed.
• Whether work matches the approved scope. A converted garage that was not in the budget is a change order, not a draw.
• Overall progress, so the lender can see that remaining funds are enough to finish the project.

To make inspections go faster, keep the property accessible, label rooms in your photos, and keep copies of permits and passed municipal inspections on hand. Local permitting and inspection rules follow building codes that most jurisdictions adopt from model codes published by the International Code Council, with local amendments. A lender inspector may ask whether required city inspections have been signed off, especially before releasing drywall-phase money.

Draw fees, inspection fees and interest on undrawn funds

Draws cost money, and those costs belong in your deal analysis.

• Draw or processing fee. A flat fee per draw request. Amounts vary by lender; a few hundred dollars per draw is common, and some lenders include a set number of draws in their origination fee.
• Inspection fee. Charged per site visit, sometimes collected up front at closing for an estimated number of inspections. Remote or photo-based inspections may cost less.
• Wire fees. Small, but they add up over five or six draws.
• Interest on the holdback. On a Dutch-interest loan, you pay interest on the full loan amount, including money the lender has not yet released. On a non-Dutch loan, you pay only on what has been disbursed. On a large holdback this difference can be meaningful; run both versions in the Dutch interest calculator.

Because the number of draws drives the fee total, fewer, larger draws are cheaper but require more cash float. More, smaller draws reduce float but cost more in fees and add inspection delays. There is no universally right answer; it depends on your cash position and your contractor’s terms. See points and fees explained for how draw fees fit with origination points and other lender charges.

Worked example: a four-draw rehab schedule

Here is a hypothetical single-family flip. All numbers are illustrative only.

• Purchase price: $200,000
• Rehab budget: $80,000
• Lender funds 90% of purchase ($180,000) at closing and holds back 100% of rehab ($80,000)
• Total loan: $260,000 at a hypothetical 11% interest-only rate
• Hypothetical draw fee plus inspection: $300 per draw

The draw schedule

• Draw 1 — Demolition, framing repairs, dumpster: $16,000 (20%)
• Draw 2 — Roof, plumbing, electrical and HVAC rough-ins: $24,000 (30%)
• Draw 3 — Windows, insulation, drywall, cabinets: $24,000 (30%)
• Draw 4 — Flooring, paint, fixtures, appliances, punch list: $16,000 (20%)

Four draws at $300 each cost $1,200 in draw-related fees, roughly 1.5% of the rehab budget in this example.

The cash float

On a reimbursement basis, the largest draw is $24,000, so the investor should have at least that much available (plus a cushion) to pay the contractor before each reimbursement arrives. If the investor’s contractor bills weekly, the float could be even higher during the busiest phase.

Partial approval

Suppose at Draw 2 the roof is done ($9,000 line) but the HVAC is only half installed ($8,000 line), while plumbing and electrical ($7,000 combined) are complete. The inspector might approve $9,000 + $7,000 + $4,000 = $20,000 of the $24,000 requested. The remaining $4,000 stays in the holdback for the next draw.

The interest difference

With Dutch interest, the borrower pays 11% on $260,000 from day one, about $2,383 per month. With non-Dutch interest, the borrower starts at 11% on $180,000, about $1,650 per month, and the payment rises as draws fund. Over a six-month project the gap can run into several thousand dollars. Try your own numbers in the draw schedule calculator.

Lien waivers: protecting the title as money moves

Every contractor, subcontractor and material supplier who works on a property may have the right to file a mechanic’s lien if they are not paid. A lien clouds title and can block your sale or refinance. That is why lenders often ask for lien waivers with draw requests.

There are generally two kinds:

• Conditional waiver — the contractor waives lien rights for a payment once that payment clears. Used when submitting a draw before the contractor has been paid.
• Unconditional waiver — the contractor confirms payment was received and waives lien rights for that amount. Collected after payment.

Mechanic’s lien law is set state by state, and the rules on notice deadlines, waiver forms and filing windows vary a lot. Some states prescribe specific statutory waiver forms; Texas, for example, sets out its lien and waiver rules in Chapter 53 of the Texas Property Code. Look up your own state’s statute through the Justia state codes index, and consider having a local real estate attorney review your contractor agreement and waiver process.

Good practice: collect a waiver from your general contractor with every payment, and ask the GC for waivers from major subcontractors and suppliers, especially roofing, HVAC, windows and cabinets, where single invoices are large.

Change orders and budget reallocations

Renovations rarely go exactly to plan. You open a wall and find rotted subfloor, or the city requires an electrical panel upgrade you did not budget for. These are change orders, and lenders handle them carefully because they change the collateral and the budget at the same time.

Reallocating between line items

Many lenders will let you move money from one line item to another, for example from landscaping to subfloor repair, as long as the total budget does not change and the work still supports the after-repair value. Expect to submit a revised budget and wait for written approval before drawing on the new allocation.

Increasing the total budget

If the project needs more money overall, the lender may require you to fund the overage yourself, or it may re-underwrite the loan, which can involve a new valuation and possibly a loan modification fee. The lender’s first concern is whether the remaining holdback is enough to finish the job. If it is not, expect the lender to ask you to deposit the shortfall before it releases more draws.

Rising material costs

Material prices move, sometimes quickly. The Bureau of Labor Statistics Producer Price Index publishes price indexes for construction inputs such as lumber and other building materials, which can help you sense-check a contractor’s claim that costs have gone up since the bid. A contingency line in the original budget is far easier than a mid-project change order.

Timing your draws to avoid stalled projects

Most draw problems are schedule problems. A few habits keep money moving:

• Request early in the week. Inspectors and funding teams generally work business days. A Friday-afternoon request may not be inspected until the following week.
• Bundle line items. Wait until a meaningful chunk is complete rather than requesting a small draw every few days, which multiplies fees.
• Do not let the contractor get too far ahead. If your contractor completes three phases before you request a draw, you are floating three phases of cost.
• Keep the final draw in mind. Lenders often hold the last draw until the work is fully complete, sometimes including a certificate of occupancy on ground-up builds. Plan your listing or refinance timeline around that.
• Watch the maturity date. Draws generally stop when the loan matures. A slow project on a 12-month term can run out of time before the holdback is fully used. Ask about extension terms up front.

Some lenders also hold back a small retainage from each draw, often released at completion. If a lender uses retainage, factor it into your float.

Questions to ask lenders about their draw process

Draw terms vary more between private lenders than headline rates do, and they can make or break a project. Before choosing a lender, ask:

• Do you fund 100% of the rehab budget, and is any portion advanced at closing?
• Are draws reimbursement-only, or will you advance for materials?
• What is the draw fee and inspection fee, and how many draws are included?
• Do you use in-person inspectors or photo/video inspections?
• What is your typical turnaround from draw request to wire?
• Is interest charged on the full loan (Dutch) or only on drawn funds?
• Do you allow line-item reallocations, and how are change orders approved?
• Do you hold retainage or require the final draw to wait for a certificate of occupancy?

On Hard Money Lender Match, you can compare anonymized lenders’ pricing for fix & flip loans and ground-up construction loans side by side, then ask your shortlisted lenders these draw questions directly before you commit.