Rehab draws: how hard money lenders release renovation money
The single most misunderstood line on a fix-and-flip term sheet is the rehab budget. A loan quoted as “$200,000 purchase plus $60,000 rehab, 100% of construction financed” does not put $60,000 in your account on closing day. It puts $60,000 in the lender’s account, and hands it back to you in pieces, after the work is done and someone has driven out to confirm it.
Why the money is held back
A rehab loan is secured by a property whose value depends on work that has not happened yet. If the lender advanced the full budget at closing and the project stalled, the collateral would be a half-demolished house securing a loan sized for a finished one. Holding the funds and releasing them against completed work keeps the loan balance roughly aligned with the value actually in the ground, which is the same logic that governs ground-up construction lending — with one practical difference: on a rehab, there is already a habitable or semi-habitable building, so the first draw usually comes faster and the schedule has fewer stages.
The consequence for you is straightforward and expensive: you pay contractors first and get reimbursed second. Every investor who runs out of cash on a funded project runs out of it here.
The schedule of values
Underwriting starts from a line-item budget, often called a schedule of values. The lender will not accept “rehab: $60,000”; it wants each scope priced, because each line becomes a releasable amount. A typical structure on a $60,000 cosmetic-to-moderate rehab, split into four draws:
| Draw | Scope completed | Illustrative amount | Cumulative |
|---|---|---|---|
| 1 | Demolition, dumpsters, roof, exterior repairs | $15,000 | $15,000 |
| 2 | Rough mechanical, electrical, plumbing; windows; framing repairs | $18,000 | $33,000 |
| 3 | Drywall, paint, flooring, kitchen and bath cabinetry | $18,000 | $51,000 |
| 4 | Fixtures, appliances, landscaping, punch list, final clean | $9,000 | $60,000 |
Two things about this table are negotiable and worth negotiating before closing. First, the number of draws: four is common, but some lenders allow unlimited draws with a per-draw fee, and more draws mean less of your own cash tied up at any moment. Second, whether the lender funds by percentage of completion (an inspector estimates that 40% of the total scope is done and releases 40% of the budget) or line item (only the specific completed lines are released). Line-item funding is stricter and punishes you for working out of order — a very common reason a draw comes back smaller than requested.
How a draw actually moves
- You complete a stage and pay for it — labor, materials, permits.
- You submit a draw request: the line items claimed, dated photographs, sometimes invoices and lien waivers from subcontractors.
- An inspection is ordered. Some lenders send a third-party inspector, some accept a photo or video inspection through an app on smaller loans. The visit itself is short; the report is what takes time.
- The lender approves an amount — not always the amount requested — and wires it, usually to you, sometimes jointly to you and the contractor.
Budget one to three business days for a routine inspection report and up to five to ten from request to wire at slower shops, plus an inspection fee commonly in the $150 to $350 range per draw, occasionally with a rush option. These are indicative market figures rather than a quote; the numbers that bind you are the ones written in your loan agreement. When you are comparing lenders, draw turnaround belongs on the same page as rate and points — a shop that is half a point cheaper and ten days slower on every draw is not cheaper. The other pricing dials are in our guide to hard money rates, points and LTV, and vetting questions in how to find and vet a hard money lender.
The cash gap, with numbers
Take the $60,000 rehab above with four draws and an average of two weeks between paying a crew and receiving the reimbursement. To stay ahead of the first two draws you need roughly $33,000 of working capital, plus the money you already brought to closing, plus carrying costs. On a 12-month loan of $245,000 at an illustrative 11%, interest-only, that is about $2,250 a month in interest, plus taxes, insurance and utilities of perhaps $400 to $700 a month.
| Cash requirement during the project | Illustrative amount |
|---|---|
| Down payment at closing (10%–20% of purchase, plus points and fees) | $25,000–$45,000 |
| Work funded ahead of the first two draws | ≈ $33,000 |
| Six months of interest at 11% on $245,000 | ≈ $13,500 |
| Six months of taxes, insurance, utilities | ≈ $3,000 |
| Retainage held until the end (5%–10% of the budget) | $3,000–$6,000 |
| Contingency at 10%–15% of the rehab budget | $6,000–$9,000 |
Some of that recycles as draws land, so the peak need is lower than the sum — but the peak is what matters, and it usually arrives around the mechanical stage, before any draw has cleared. Investors who plan only for the down payment are the ones who stall at drywall. Contractor payment terms are the cheapest lever here: a crew that bills at stage completion rather than weekly effectively finances your gap, and a lender that funds by percentage of completion shortens it.
Retainage, the first draw, and interest on money you do not have
Three details change the arithmetic more than most borrowers expect.
- Retainage. Many lenders hold 5% to 10% of each draw until the project is complete and, on larger scopes, until final inspection or a certificate of occupancy. That is real money locked up for the whole term.
- The first draw. Ask whether any portion is released at closing or shortly after for demolition and permits. Some programs allow it for experienced borrowers; many do not, which means the first stage is entirely on your card.
- Interest on the full balance or only on funds drawn. If interest accrues on the whole $245,000 from day one rather than on the drawn balance, the difference on a $60,000 rehab held back over eight months runs to a few thousand dollars. Ask which it is, in writing, and compare quotes on that basis rather than on the headline rate.
What stalls a draw
- Work done out of order. You installed cabinets before the rough plumbing passed; a line-item lender releases the plumbing line, not the cabinets.
- Missing permits or a failed municipal inspection. Lenders will not fund work that the city has not signed off on when a permit was required.
- Change orders. Discovering knob-and-tube wiring changes the budget. Submit a revised schedule of values and get written approval; unapproved overages are usually not reimbursed.
- Mechanic’s liens. An unpaid subcontractor who records a lien clouds title, blocks the draw and threatens the sale. Collect lien waivers with every payment.
- Access. The inspector could not get in. Trivial, and it costs a week.
- A late loan payment. Most agreements suspend draws while the loan is not current, which is how a cash squeeze becomes a default — see what happens in a hard money default and the state-by-state timelines on our hard money state pages.
Claude Loan is an information site, not a lender, broker or contractor. The ranges above are indicative market observations, not offers, and no lender is obliged to release any draw except on the terms of your own loan agreement — read the draw section of that agreement before closing, not after the first request. The broader deal math sits in our guide to fix-and-flip financing.
Frequently asked questions
Can I get rehab money before the work is done?
Rarely. The standard structure is reimbursement after completion and inspection. A minority of programs release a small initial draw for demolition, permits or materials to experienced borrowers with a track record; ask specifically, because it is a program feature rather than something you can negotiate at the closing table.
How many draws should I ask for?
Enough that you are never carrying more than you can afford. Four to six is typical on a moderate rehab; more draws mean less cash tied up but more inspection fees. Model both: at $250 per inspection, going from four to eight draws costs $1,000 and might free up $15,000 of working capital for weeks at a time.
Do I pay interest on the rehab funds I have not received?
It depends on the loan. Some lenders charge interest only on the drawn balance; others accrue on the full committed amount from day one. The second structure can add thousands of dollars over the term of a project, so confirm it in writing and factor it into any comparison between quotes.
What happens if the rehab goes over budget?
The lender is not obliged to increase the loan. Overages typically come out of your pocket, which is why lenders want to see a 10% to 15% contingency and cash reserves at underwriting. If the overrun is large, raise it early: a lender may re-underwrite the budget against the after-repair value, but only when there is room under the loan-to-value limits described in how lenders evaluate ARV.
Sources
Related: Fix-and-flip financing: structuring the loan around the project, Hard money rates, points and LTV: typical ranges and what moves them, Hard money for new construction: ground-up loans, draws and the exit, How hard money lenders evaluate ARV — and how to estimate it yourself. Hub: Hard money.