Interest Reserve

How it is sized and drawn.

The reserve is a line in the budget, estimated from the loan amount, the rate, the expected draw schedule and the months to completion: interest is small early, when little has been disbursed, and grows as the balance does. Each month the lender advances the interest due from the reserve, the loan balance rises by that amount, and the borrower makes no payment until the reserve runs out or the loan converts.

Where the draw inspection fits.

The reserve assumes a build that keeps pace with the schedule. When progress stalls, the reserve keeps paying interest on a project that is not moving, and the loan can look current while the collateral stands still. Progress inspections are how the lender sees the gap: a reserve that is 60 percent consumed on a house that is 30 percent built is the signal, and the inspection report is where the 30 percent comes from. How often are draw inspections required? covers the cadence that keeps the comparison current.

Why it matters for lenders.

Supervisory guidance on construction lending warns that an interest reserve can mask a troubled loan, and the OCC's Commercial Real Estate Lending handbook asks lenders to monitor whether the project's progress still supports the reserve rather than let it keep a stalled loan current. When the reserve is exhausted before the certificate of occupancy, the borrower pays out of pocket, the lender extends, or the loan defaults, and the earliest warning is a percent complete that lags the interest consumed.

How RAZE handles it.

RAZE's line-item percent complete gives the administrator the progress side of the comparison on every inspection, with the photos behind it. Reserve policy and the response to a lagging project stay with the lender.