Interest Reserves and Draw Schedules Explained

How draws work

1. You complete a phase of work using your own funds or your contractor’s credit
2. You request a draw for the budget lines completed
3. The lender verifies the work by inspection or photos
4. The lender releases funds for the verified work, minus any fees

Because draws usually reimburse completed work, you or your contractor need enough cash to fund at least the first phase. Some programs offer an initial advance at closing.

Interest reserves

An interest reserve is an amount included in the loan to pay interest for some or all of the term. It increases the loan amount, so it counts against the lender’s leverage limits, but it can greatly reduce monthly out-of-pocket costs during a project with no income. Not every program offers one.

Interest on drawn funds

Some lenders charge interest only on funds actually disbursed, while others charge on the full loan amount from closing. Ask which applies; it changes total project cost.

Planning tips

• Map draw milestones to your budget before closing
• Ask how long draw turnaround typically takes
• Keep receipts and photos organized by budget line