How Construction Draws Actually Work on a Fix & Flip Loan (The Rehab Holdback Explained)

This is one of the first conversations I have with every new investor I work with. Say your loan gets approved with a $50,000 rehab budget. A lot of first-time investors assume that $50,000 hits their account at closing. It does not. It sits in a holdback/escrow account, waiting to be reimbursed to you draw by draw.

What a Lender Holdback Is

A fix and flip loan has two parts. The first part goes toward the purchase of the property, and it disburses at closing. The second part is your rehab budget, and it does not disburse at all on day one. It gets set aside, held back, which is where the name comes from. You will hear it called a rehab holdback, a construction holdback, an escrow holdback, or a repair escrow. Different lenders, different paperwork, same thing: money the lender has committed to your project but has not released yet.

You will see the holdback on your closing statement, but the lender usually is not pre-wiring that money to the title company. It lives in your loan documents as a binding commitment, released from the lender's own account as you draw. Two side effects most first-timers do not expect: your rehab budget goes to the appraiser and gets factored into the after repair value, and you sign the finalized budget at the closing table.

Why Your Loan Amount Looks Bigger Than What Funded

Let's put real numbers to this, using the same deal from my cash to close breakdown. You buy at $200,000 with a $50,000 rehab budget, and you are putting ten percent down on the purchase.

That is the whole confusion in one sentence. The loan amount on your HUD is $230,000, but only $180,000 of it moved at closing. The other $50,000 is yours to draw upon as the work is completed.

Why Do Lenders Do It This Way?

Think about it from the lender's chair. On our deal, you put $20,000 down and the lender is committing a $50,000 rehab budget. If they handed you that $50,000 at closing, they would have wired out more than twice the cash you put into the deal, and nothing but your good intentions would stop you from walking away with it. Draws exist so the lender's money only ever goes out behind completed work. It is not personal, and it is not them doubting you. It is the only structure that protects the money on every deal they fund.

The Draw Process, Step by Step

Draws are reimbursement. You pay for the work first, then the lender pays you back. Here is the cycle:

1. You complete a phase of work. Demo, roof, HVAC, whatever your approved scope of work lists. You or your contractor pay for it out of pocket.
2. You submit a draw request. Most lenders have a portal or a simple form. You reference the line items on your approved budget and attach photos, invoices, and receipts.
3. The lender verifies the work. Some lenders send an inspector, either someone on their own payroll or a third-party service like Inspectify. More and more have gone virtual: of the lenders I work with, roughly sixty percent now verify draws through photos you submit, and about forty percent still send someone in person.
4. The draw is approved against your budget. The lender releases funds for the completed line items. Not the next phase, not a round number, the completed line items.
5. The money wires to you. Clean, well-documented requests fund fast. Sloppy ones sit in someone's queue.

From request to money in hand, one to three business days is typical, assuming the work is complete and your documentation is clean. Plan your contractor schedule around that gap, because your electrician does not care that your draw is processing.

Most lenders will not cap you either. No minimum draw amount, no maximum number of draws. You could request one every week. You should not.

You Front the Work. Plan for It.

This reimbursement structure is why lenders want to see rehab reserves, usually somewhere between twenty and thirty-three percent of your budget, before they close. It is not bureaucracy. It is the answer to a simple question: can you pay for phase one before the first draw pays you back?

It is also where first flips stall. Most contractors want a deposit up front, and draws only reimburse completed work. That mismatch, deposit out today, reimbursement in next week, is the cash crunch nobody warns new investors about. If your liquidity is thin after closing, sequence the early work so the first draw comes fast: knock out a phase that is cheap to start but easy to verify, get the draw cycle moving, and let the reimbursements start rolling behind the work.

One more thing, because I get asked: none of the lenders I work with advance rehab money before the work is done. If you want cash up front to run your own rehab, that is a different product entirely, closer to a cash out refinance.

Build In a Contingency (Some Lenders Will Force You To)

About half the lenders I work with require a ten percent contingency line in the rehab budget, and some of them will simply add it themselves if your budget shows up without one. The other half do not require it at all. Required or not, I tell every investor the same thing: build the ten percent in yourself. Cost overruns happen on nearly every project, even the well-planned ones, and a contingency line inside the budget means the overrun is already financed instead of coming out of your pocket mid-project.

What Draws Cost

Draw fees are one of those line items lenders rarely volunteer, so ask for the draw fee schedule before you sign. On most fix and flip loans you should expect an inspection fee of roughly $150 to $250 per draw. A few lenders charge nothing, but free draws are the exception, not the rule, and some add a wire fee on top. On a project with four draws, that is several hundred dollars of real cost.

Materials on Site Do Not Count (But Partial Work Does)

This is the rule I end up explaining to every first-time investor: lenders reimburse installed work. If you have a garage full of cabinets and a lumber package sitting in the driveway, that is not a draw. It does not count until it is part of the house.

Partially completed work is a different story. Say you have $4,000 allocated to paint, and the downstairs is finished but the upstairs is not. Most lenders, I would put it at over eighty percent of the ones I work with, will do a partial reimbursement and fund that line item proportionally, so roughly $2,000 in that example. You do not have to wait for a line item to be one hundred percent complete to get paid on it.

Your Rehab Budget Has to Be Market Pricing

Here is a conversation I commonly have with investors who double as contractors. A lot of times they'll build a budget where they do the labor themselves and only count materials, come in around $40,000, and then the lender pushes the budget to $60,000. They are surprised, sometimes annoyed, until I explain why.

The lender prices your rehab as if a contracting company had to do it, because in the scenario they underwrite for, the one where the borrower defaults and they take the property back, a contracting company will have to do it. They need the full market cost of finishing the project baked into the loan and into their loan-to-value math from day one.

Once contractor-investors see it that way, most of them like it. The budget has room to pay yourself market rate for your own labor, so the rehab is another job you are getting paid on. And since the appraiser factors that budget into the after repair value, an honest market-priced budget supports your appraisal instead of dragging it down.

How to Read the HUD (And Why Everyone Still Calls It That)

Quick history, because the name confuses people. The HUD-1 was the settlement form nearly every closing in America used for decades, until the CFPB replaced it with the Closing Disclosure for consumer mortgages in 2015. But a hard money loan to your LLC is a business-purpose loan and exempt from those rules, so investor closings still run on a HUD-1 style statement or, more commonly now, the ALTA Settlement Statement. Investors just call the whole family "the HUD."

Whichever version lands in your inbox before closing, read it top to bottom the same way:

• The header. Parties, property, lender, and two dates that matter: the settlement date and the disbursement date.
• The financial section. Purchase price, your earnest money coming back to you as a credit, and the loan amount. This is where the full $230,000 shows up, holdback included.
• Loan charges. Origination points, the broker fee, prepaid interest, and any lender processing fees, each on its own line. Every one of these should already be on your term sheet.
• Title and escrow charges. Title insurance, the escrow or settlement fee, and recording fees.
• Prorations. Property taxes and anything else split between you and the seller based on the closing date.
• The bottom line. "Due from Borrower." That is your cash to close, and it should match what your lender or broker told you.

Three lines to check on every HUD before you wire a dollar: the total loan amount, the amount the lender is actually funding at closing, and the balance due from borrower. If the gap between the first two numbers confuses you, now you know what it is. That gap is your holdback. And if any number does not match your term sheet, call before you sign, not after.

Interest on the Holdback (And Why You Might Not Draw It All)

On a standard interest loan, the holdback behaves like a line of credit. You pay interest only on what you have actually drawn, and nothing on the untouched balance. That opens up real strategy. If you finish a $4,000 paint line for $3,000, you can draw the full $4,000 and keep the difference as payment for your work, or draw just the $3,000 and pay interest on less. I have investors who wait months into a project before their first draw, and a few who never touch the holdback at all, because the loan already got them into the deal with less cash down and they would rather fund the rehab themselves than pay interest on borrowed rehab money.

The structure that kills that flexibility is called Dutch interest, where you pay on the full loan amount from day one, including holdback you have not touched. I wrote a full breakdown with the side-by-side math in Dutch interest vs. standard interest. For what it is worth, I have never once placed a Dutch loan. Every loan I have brokered has been standard interest. The only time I would recommend Dutch is a rare scenario: an experienced investor who knows for a fact the rehab is done in two months or less can take the lower rate Dutch loans usually carry, get in, and get out. If you are newer, or the rehab could run long, standard interest is your security. Finish under budget or ahead of schedule and you saved money just by choosing it.

Here is the difference on our example deal. Both cards below run the same numbers. The first is set to standard, the second to Dutch. Each shows the day one payment, the full draw payment, and a slider for everything in between. Toggle either card to flip the structure.

This is a stripped-down slice of the Deal Analyzer. The full version, with fees, hold costs, profit, and cash to close, lives in the borrower portal.

Where I Fit In After Closing

Once the loan closes, you request draws directly from the lender. That is normal, and it is how every lender I work with runs it. But brokering the loan does not end at the closing table for me. I am the one who calls the lender when the process is unclear, gets straight answers on what a draw request needs, and applies pressure when a draw sits in someone's queue longer than it should. If your draw stalls, you are not chasing a lender's draw department alone.

Frequently Asked Questions