Rehab and construction lenders don't hand you the whole budget at closing. They release it in draws as work is completed, and you pay interest only on what's been drawn. Planning those draws tells you how much cash you need and when.
How a Draw Works
- Request. You or your contractor submit a draw request for completed work, usually with invoices and photos.
- Inspection. The lender or a third-party inspector visits the site to confirm the work matches the request and the plans.
- Paperwork. Many lenders ask for lien waivers from the contractor and subcontractors who were paid from the last draw.
- Funding. The lender releases the approved amount, minus any draw or inspection fee.
Most draws reimburse completed work, so you or your contractor usually front the cost of each phase until the draw funds.
Retainage
Some lenders hold back part of each draw, commonly 5–10%, until the project is finished and final lien waivers are in. Plan for that money arriving at the end, not along the way.
Interest on Drawn Funds
With a draw-based loan, interest is charged only on the balance drawn so far, which keeps early carrying costs low.
A $120,000 rehab budget at 11%, drawn in four equal $30,000 draws over the first four months, on a six-month project.
| Month | Balance drawn | Interest that month |
|---|---|---|
| 1 | $30,000 | $275 |
| 2 | $60,000 | $550 |
| 3 | $90,000 | $825 |
| 4 | $120,000 | $1,100 |
| 5 | $120,000 | $1,100 |
| 6 | $120,000 | $1,100 |
Total rehab interest: $4,950, compared with $6,600 if the full $120,000 accrued interest from day one.
Common Draw Patterns
- Even: the same amount each month. Simple, and fine for steady renovations.
- Front-loaded: larger draws early, typical when demolition, foundation and framing come first.
- Back-loaded: larger draws late, typical when finishes and fixtures are the big costs.
- Custom: percentages matched to your contractor's schedule of values.
Interest Reserves
Some lenders fund an interest reserve: they set aside part of the loan to pay the monthly interest, so you don't pay it out of pocket during construction. The reserve is still borrowed money, so it raises your loan balance and payoff.
Draw fees, inspection fees and retainage vary by lender. Ask for the draw schedule and fee sheet before you sign.
Sources
- What Is a Construction Draw?, Sekady
- Construction Draws (training slides), Texas Department of Housing and Community Affairs
Educational information only, not financial, lending, legal or tax advice. Lender programs, rates and tax rules change; confirm with your lender, attorney or tax advisor. See the disclaimer.