What is a construction holdback?

How a holdback works.

At closing, the lender funds the purchase or land portion of the loan and holds back the construction or renovation budget. The budget is broken into line items or stages on a draw schedule. As each stage is finished, the borrower requests a draw, an inspector documents the work, and the lender releases the documented amount from the holdback. The holdback shrinks with every draw until the budget is spent and the project is complete.

Holdback, retainage and interest reserve.

The three terms describe different money:

• Holdback (the rehab or construction budget): the unfunded budget, released draw by draw against completed work.
• Retainage: a percentage withheld from each payment, released at completion once the final inspection and lien waivers are in.
• Interest reserve: loan money set aside to pay interest during construction, not to pay for work.

Lenders and loan agreements use these words loosely, so read the definitions in your own documents.

What can go wrong.

The main risk is a holdback that can no longer finish the job. If early draws are front-loaded, or costs rise, the remaining holdback may not cover the remaining work. The FDIC's construction and land development examination procedures ask whether the undisbursed loan balance is sufficient to complete the project, and they flag front-loaded budgets for the same reason. The NCUA's examiner's guide makes the same point for credit unions: disbursements should track real progress.

Why it matters for lenders.

Until the project is finished, the holdback is the lender's leverage. Releasing it only against documented work, line by line, keeps the remaining balance tied to the remaining work.

How RAZE handles it.

RAZE draw inspections report percent complete for each draw sheet line, with photos linked to the lines they support, so the lender can see how far each budget line has progressed before releasing the next part of the holdback. Through RAZE it is a flat $125 per single-family inspection when RAZE sends the inspector, or $25 per request with your own inspector, per the RAZE Rate Card. RAZE documents the work; the lender decides what to release.