Residential Rehab – Fix and Flip Loans

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Interest Payment Calculation

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Payment Amounts Change / Increase

Your interest payments are made in arrears, meaning that every interest payment amount due is for the daily interest accrued in the prior month.

There can be several reasons for payment amount changes:

• Number of days in the prior month: Some months have 30 versus 31 days.
• Construction Draws: Approving and releasing construction draws will increase the unpaid principal balance of the loan. A higher unpaid principal balance will increase the daily interest accrual amount.
• Loan Maturity Extensions: Loan extension fees not paid upfront will be accrued and added to the principal balance. This will also cause an increase in our daily interest accruals.

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Monthly Payments

Payments are due on the first of every month. There is a ten-day calendar grace period. Payments received prior to the 10th of the month will not incur a late fee. Late fees are 10% of the payment amount.

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1) Loan is approved with a construction budget + draw schedule

At loan commitment the lender locks in:

• Total project budget (hard + soft costs + contingency)

• Draw schedule (line-item budget or milestone-based)

• Borrower equity requirement (how much cash must go in first)

Also required:

• Builder contract

• Plans/specs

• Permits (or proof they’re in process)

• Appraisal with “as-completed” value

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2) Borrower money in first

The borrower is usually required to contribute their equity before the lender starts reimbursing heavily unless the borrower has substantial equity in the project already.

Common approach:

• Borrower puts in down payment + initial costs (demo, permits, foundation, etc.)

• Lender begins draws once verified work is in place

This is often called:

• “Equity first”

• “Borrower in first position”

• “Cash in the deal first”

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3) Funds are released through draws (not automatically)

A draw is typically requested when a phase is completed (or partially completed).

Typical draw flow:

1. Borrower submits draw request (sometimes with invoices/receipts)

2. Lender orders inspection (or uses photo inspection)

3. Inspector confirms % completion

4. Lender funds draw to borrower, builder, or escrow

5. Lien waivers collected

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4) Disbursement methods: reimbursement vs direct pay

Reimbursement Options (dependent on deal):

A) Reimbursement model (very common)

• Borrower pays contractor/materials

• Lender reimburses approved costs

B) Direct-to-contractor model

• Lender pays builder/subs directly (or joint checks)

C) Construction escrow / closing attorney

• Funds held in a lender controlled escrow account

• Escrow disburses after lender approval

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5) Disbursements based on inspected progress, not always receipts

Even if the borrower submits receipts, the following are considered:

• % complete

• materials in place

• stage/milestone completion

This prevents front-loading and fraud.

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6) Typical draw schedule (example)

A common schedule looks like:

• Draw 1: Site work / foundation

• Draw 2: Framing

• Draw 3: Rough MEP (mechanical/electrical/plumbing)

• Draw 4: Drywall / interior finishes

• Draw 5: Trim / cabinets / flooring

• Draw 6: Final / CO (certificate of occupancy)

Some lenders use 5–8 draws. (dependent on project)

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7) Interest is charged only on funds actually disbursed

This is a key feature.

Example:

• Loan amount: $600,000

• Amount drawn so far: $250,000
  → interest accrues on $250,000 (not $600,000)

Many loans require:

• interest-only monthly payments during construction

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8) Retainage is common (lender holds back part of each draw)

Hold back: (dependent on project)

• 5% to 10% retainage per draw
  to ensure completion and cover punch-list items.

Retainage is usually released at:

• final inspection

• CO issued

• final lien waivers received

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9) Title updates + lien waivers are usually required

To avoid mechanics liens, lenders commonly require:

• conditional lien waivers with each draw

• unconditional lien waivers after payment clears

• sometimes a title bring-down or endorsement each draw

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