How to track construction draws on rehab loans

What a construction holdback is

Many rehab loans fund the purchase at closing and hold back the renovation budget. The holdback is released in draws as work is completed. Until a draw is funded, that money is committed but not yet lent, which matters both for your cash planning and, on drawn-balance loans, for how much interest the borrower owes.

Start with a line-item budget

Every draw should be measured against an agreed budget. Before closing, get a budget broken into line items the borrower and you both understand — demolition, roof, framing, mechanical, finishes, and so on — with a dollar amount for each. Vague budgets make for vague draws.

Record the budget in the same place you record draws, so each request can be compared to what's left in that line.

Decide how draws will be requested

There are two common draw types. A forward advance funds work that is about to happen. A reimbursement pays the borrower back for work already completed and paid for. Reimbursements should come with receipts; both should come with progress photos.

Set a standard for what a complete request includes: the amount, which budget lines it covers, a description of the work, photos, and receipts where relevant. Requests that arrive by text with a single photo create problems later when you need to show why a draw was approved.

Inspect before you fund

An inspection — in person, by a third-party inspector, or by detailed photo and video review — confirms that the work claimed has been done. The inspection should be tied to the specific draw it supports, with notes on anything incomplete. Many lenders charge an inspection fee; if you do, record it consistently.

Approve what the work supports

You don't have to approve the full amount requested. If the inspection shows a line is half finished, approve half. Communicate the approved amount and the reason clearly. Borrowers are far more comfortable with a reduced draw they understand than a delayed one they don't.

Fund and record

When you fund a draw, record the date, the amount, how the funds were sent, and which budget lines were reduced. Update the remaining holdback immediately. On drawn-balance loans, the interest-bearing balance increases from the funding date, so the per diem changes too.

Keep a running summary for each loan: total budget, total funded, remaining holdback, and percent complete. That summary is what you'll want in front of you before every new request.

• Total construction budget and budget by line
• Each draw: requested, approved, and funded amounts and dates
• Inspection notes and photos per draw
• Remaining holdback after each funding

Watch for warning signs

Draws that run ahead of visible progress, repeated requests against the same line, or a budget that's mostly spent with major work remaining are all signals to slow down. So is a borrower who stops sending photos. Catching a stalled project early gives you more options than discovering it at maturity.

Keep your capital partners informed

If a bank or investor provides part of the money, they will want to see draw activity. Sharing the specific draw — request, photos, inspection, and approval — answers most questions without a meeting.

Communicate the process up front

The smoothest draw processes are explained before closing. Give the borrower a one-page summary: how to request a draw, what a complete request includes, how long review usually takes, whether inspections are required, and how funds are sent. Borrowers who know the rules up front submit better requests, and you spend less time chasing photos and receipts.

Agree, too, on what happens if the budget changes. Contractors find surprises behind walls. A clear process for reallocating money between budget lines — with your approval, recorded on the loan — keeps a change order from turning into an argument.

Close out the holdback

When the project is finished, do a final inspection, fund the last draw, and confirm whether any holdback remains. Decide, according to your note, whether unused holdback is released, applied to principal, or simply never funded. Record the outcome so the payoff reflects what was actually lent. This guide is general information, not legal advice.