Rehab holdback: loan money reserved for the work and paid out in draws

Total loan, acquisition advance and holdback

Three loan figures show up on a rehab loan, and mixing them up leads to surprises at the closing table.

• Total loan. The full commitment: the amount on the note, the number the leverage limits are measured against, and the base for points.
• Rehab holdback. The share of the rehab budget the lender funds (budget × rehab funding %), kept back at closing. It can never be larger than the loan.
• Acquisition advance. The total loan minus the holdback, funded at closing toward the purchase. It never exceeds the purchase price. Lenders also call it the initial advance or initial funding.

The order matters. The lender sizes the total loan first, from the As-Is LTV, LTC and LTARV limits (see LTV vs LTC vs LTARV). The holdback comes off the top of that number and the advance is whatever is left. So when a limit cuts the loan, it cuts the money for the purchase, not the money for the rehab.

In Canada, “construction holdback” refers to a holdback required by construction lien law. That is unrelated to a lender's rehab holdback, which is why this page sticks to the US term.

A closing statement, line by line

Two example deals, run through the same engine as the calculators. The first is the iPhone app's own test deal, where As-Is LTV binds. The second is a smaller flip where LTC binds and the lender charges a flat fee.

Two things stand out. First, points are charged on the total loan, holdback included: on the Maple Ave deal, $2,000.00 of the $5,600.00 in points is on rehab money that hasn't been disbursed. Second, when the lender funds all of the rehab, none of the borrower's cash at closing goes to the rehab. It's the part of the price the advance doesn't cover, plus the lender's charges. On the flip, that's $25,500 of purchase equity plus $4,590.00 in points and a $1,295.00 fee. The cash to close guide walks through that waterfall and the third-party costs it leaves out.

The bar shows the Maple Ave deal on one scale. The project costs $400,000. The loan covers $180,000 of the purchase at closing and the full $100,000 rehab through draws; the borrower funds the remaining $120,000, all of it toward the purchase.

When the lender funds less than all of the rehab

Some programs fund only part of the rehab budget and leave the rest to the borrower. The engine applies the percentage first: holdback = budget × funded %. Here is the Maple Ave deal at 100% and at 80%:

As-Is LTV binds at $280,000 either way, so the loan doesn't move. Lowering rehab funding shifts $20,000 out of the holdback and into the advance: the borrower brings $20,000 less at closing and pays $20,000 of the rehab out of pocket instead. The total stays at $120,000; only the timing changes, and for the lender more of the loan is out on day one.

Rehab funding changes the size of the loan only when the financed-project cap is the lowest limit. The loan can never exceed the purchase price plus the funded share of the rehab, which is $380,000 on this deal at 80%. When that cap binds, the calculators report the loan as limited by financed project cost.

When the whole loan is holdback

Because the holdback is capped at the loan, a heavy rehab on a cheap property can leave nothing for the purchase. Take a $100,000 purchase with a $200,000 rehab and a $120,000 as-is value, under a program that applies only a 70% As-Is LTV limit and funds 100% of the rehab.

Total loanLimited by As-Is LTV

$84,000

Rehab holdbackThe entire loan

$84,000

Acquisition advanceNothing left for the purchase

$0

Borrower pays toward the purchase

$100,000

Rehab the borrower paysBudget minus holdback

$116,000

Points (2%)

$1,680.00

Estimated cash at closing

$101,680.00

The loan never touches the purchase. The borrower buys the house outright and pays the points from their own pocket, because there is no advance to deduct them from; the engine adds that shortfall to cash at closing (see when lender charges exceed the advance). Then the borrower draws $84,000 toward a $200,000 rehab and funds the other $116,000 themselves.

A result like this usually means the program and the deal don't fit. It can also mean the lender applies its as-is limit to the initial advance rather than to the total loan, a convention the calculators don't model; the LTV guide shows how far apart the two conventions land.

How draws are released

In the process Kiavi and Anchor Loans describe (Anchor's article is from January 2022), the borrower completes work, requests a draw, the work is inspected, and the lender releases funds for what was completed. The draw is a reimbursement for work done, not an advance for work planned.

1. The scope and budget are agreed before closing, and the holdback is set from them.
2. The borrower or contractor completes a stage of work, paid for with the borrower's own cash or credit.
3. The borrower submits a draw request for that stage.
4. An inspector confirms the work. The OCC's Comptroller's Handbook (March 2022) describes bank construction draws as “commensurate with improvements made as of the date of the inspection.”
5. The lender wires the approved amount, and the funded balance rises by that draw.
6. The cycle repeats until the holdback is drawn or the work is finished.

Federal guidelines for bank construction lending put the principle in one line: “Loan disbursements should not exceed actual development or construction outlays” (12 CFR Part 34, Subpart D, Appendix A). For the borrower, the consequence is cash: the first stage of the rehab is paid before any holdback money arrives, so the borrower needs working capital for it on top of cash to close.

In the funded-balance mode of the calculators, each draw is a dated amount. The fix-and-flip example closes on Nov 2, 2026 and draws its $70,000 holdback in 3 pieces:

Draws can't be dated before closing or after maturity (Aug 2, 2027 here), can't add up to more than the holdback, and total interest appears only once they add up to the whole holdback. Build your own schedule in the fix and flip loan calculator.

Retainage: a holdback inside each draw

On construction loans the word “holdback” has a second meaning. Instead of reserving loan money for future work, retainage withholds a slice of each payment until the project is complete. The OCC handbook says that under progress payment plans a bank “normally retains, or holds back, 10 to 20 percent of each payment.” HUD's draw request form for 203(k) rehabilitation loans, HUD-9746-A, has a line that reads “Less 10% Holdback.”

Neither this site's calculators nor the iPhone app model retainage: each draw you enter is released in full on its date. To approximate it, enter each draw net of the retained share and add the retained total as a final draw near completion. That keeps the funded-balance interest closer to what the loan will actually charge.

Interest on undrawn holdback

Whether the lender earns interest on money it hasn't released yet depends on the note. Under full-balance terms, often called Dutch interest, interest runs on the entire loan from closing, holdback included. Under funded-balance terms (non-Dutch), it runs on the advance from closing and on each draw from its date.

On the fix-and-flip example at 11% for 9 months, full-balance interest is $18,933.75. Funded-balance interest on the draw schedule above (Actual/360) is $17,307.74, a $1,626.01 gap. Part of that gap is the day count, not the holdback: full-balance interest is counted by the month (rate ÷ 12), while funded-balance interest counts actual days over 360. On the same Actual/360 basis, interest on the full loan for those 273 days would be $19,144.13, so interest on holdback money still sitting with the lender comes to $1,836.39.

How common is each? An AAPL report by Nema Daghbandan (February 19, 2025), built on Lightning Docs data, found that of 8,832 bridge construction loans, 28% charged Dutch interest and 72% non-Dutch. The same report found that 38% of bridge loans had no construction holdback at all. Compare both methods on your own draw dates with the Dutch interest calculator.