The Quick Read: On a full-gut rehab, the lender holds back the renovation money at closing and releases it in stages. Each release follows an inspector’s check that the claimed work is actually finished. You usually pay for a phase first and get reimbursed after it passes.
- Rehab money is not yours at closing. It is released in draws against completed, verified work.
- Materials delivered but not installed typically do not count as progress.
- Each draw usually needs a request, photos, lien waivers, and a passing inspection.
- A gut job has many trade phases, so cash on hand matters as much as the loan terms.
- Draw procedures vary by lender, so ask how a lender runs them before you sign.
What a Draw Inspection Actually Is
A draw inspection is a check, usually by a third party, that the work you say is done is really done. The lender uses the result to decide how much of the held-back renovation budget to release. It protects the collateral. It is not a judgment of you.
What this loan actually costs to carry.
Hard money is sized against the project and priced by time. Enter the deal and see how much the program will lend, the cash required at closing, the carry while you hold it, and what is left at the exit.
Leverage tiers on the current program: 85% with fewer than 2, 90% with 2 or more, 93% with 5 or more completed projects — every tier capped at 75% of after-repair value. Loan amounts up to $5,000,000, larger by exception; terms of 6 to 18 months, interest-only, no prepayment penalty. The rehab portion funds in draws against completed work, not at closing.
Program parameters shown update from Lendmire’s centralized guideline source. Rate, points, and months are editable assumptions, not quoted terms.
Cost cap sets the loan · positive spread
Illustrative estimate only — not a quote, Loan Estimate, approval, or commitment to lend. Rate, points, and months are editable assumptions. Hard money is business-purpose financing for real estate investors, not a consumer mortgage. Leverage on the current program tops out at 93% of project cost for investors with a documented track record, capped at 75% of after-repair value, with rehab funding up to 100% of the documented budget released in draws; actual terms vary by lender, borrower experience, property, and exit. Lendmire is a mortgage broker, not a lender.
Three words come up constantly, so here are the plain versions. A draw is one release of renovation money. A holdback is the part of the budget the lender keeps until work is verified. A scope of work is the line-item plan and budget the lender approves at closing.
A gut rehab gets more scrutiny than a cosmetic one for a simple reason. You are rebuilding the house from the studs out. That means demolition, framing, plumbing, electrical, HVAC, insulation, drywall, and finishes. Every phase is a chance for the percent complete to be argued, and the early phases get buried behind walls. Lenders know that.
Draw mechanics are contractual. They live in the loan agreement and the rehab budget, not in one national rulebook. Primior’s construction-draw controls guide says exact procedures depend on the loan documents, the project, the jurisdiction, the title insurer, and the lender. Across the wholesale network Lendmire works with, the pattern is the same: no two lenders run draws identically.
What Hard Money Funds, and What Waits for a Draw
On the hard money programs Lendmire arranges through select lenders, fix-and-flip leverage is measured against project cost. It typically runs 93% of project cost for investors with five or more completed projects, 90% with two or more, and 85% with fewer than two. Every tier is capped at 75% of after-repair value. First-time investors qualify at the lower tiers, with a 620 minimum credit score and extra conditions below 660. All of this varies by lender, property, and experience, and nothing here is a commitment to lend.
Here is the part that trips people up. Up to 100% of the rehab budget funds in draws against completed work. That is a rehab-budget figure, not a purchase loan-to-value number. The purchase portion funds at closing. The renovation portion sits in reserve and comes out in pieces.
Terms on this product run 6 to 18 months, interest-only, with no prepayment penalty. Collateral is non-owner-occupied residential property, one to four units. These are business-purpose loans for investors.
The Draw Flow, Step by Step
Here is the sequence from request to cash, as most lenders run it.
1. Budget approval. The lender approves your scope of work and line-item budget at closing. The draw milestones come from it.
2. Work and request. Your contractor finishes a phase. You submit a draw request using the same line items the lender approved. YieldStack’s fix-and-flip draw guide says the request must use the approved line items, with no renumbering between draws.
3. The packet. The same guide lists the usual contents: a request showing budget, percent complete, previously drawn, and amount requested per line. It also lists dated photos, lien waivers, approved change orders, invoices, and a title update where required.
4. Inspection. An inspector visits, or reviews photos and video, and confirms the percent complete you claimed.
5. Title and lien check. Many lenders run a title date-down, which is an update to catch new liens. Primior notes a clean prior draw does not prove the current period is clean.
6. Release. The lender pays you or your contractor. Many lenders pay pro rata. A line item that is 50% complete gets about half its budget.
Who does what is simple. You request. The contractor builds and signs waivers. The inspector verifies. The lender releases.
Inspection fees and wire fees usually come with each draw. That is why some investors choose fewer, larger draws on a job. The tradeoff is more cash fronted between releases.
The Gut-Rehab Draw Map
Draw counts on a gut job depend on the scope and the lender, so treat this as a typical sequence, not a rule. The table shows what an inspector generally needs to see at each phase.
| Phase | Must be visible or complete | Evidence to submit | Common failure |
|---|---|---|---|
| Demo and structural | Open studs, framing repairs done | Dated photos, invoices | Hidden rot found, not pre-approved |
| Rough MEP | Wiring, pipes, ducts in open walls | Photos before cover, permit status | Walls closed before the visit |
| Insulation and drywall | Installed and hung, not stacked | Photos, sub waivers | Materials on site, not installed |
| Finishes | Cabinets, flooring, fixtures installed | Photos, invoices, waivers | Partial trade completion |
| Final | Punch list done, work matches scope | Final photos, all waivers | Open permits or unpaid subs |
Notice the rough-in row. Once drywall goes up, the lender cannot see what is behind it. Schedule the inspection while walls are open. Closing them first can mean an argument about work nobody can see.
Lender Inspection Versus Permit Inspection
These are two different checks, and passing one does not pass the other. A lender inspection answers one question: is the claimed percent of work done, so money can be released? A city or county permit inspection answers a different one: does the work meet code?
On a gut rehab you will usually face both. Open permits can stall a draw, and a failed permit inspection can mean the work gets redone before the lender is satisfied. YieldStack lists permits not yet passed among the common reasons a draw stalls. It also lists materials delivered but not installed, a missing or wrong-type lien waiver, and unapproved change orders.
Keep the two calendars side by side. Book your rough-in permit inspection before you book the lender’s rough-in visit. Fix any permit notes first. That way the lender’s inspector sees finished, approved work.
Lien Waivers: Why Lenders Insist
A lien waiver is a signed statement giving up the right to file a lien against the property. The Minnesota Attorney General’s homebuilding handbook lays out that definition and the lien process. Minnesota is only one example, because the rules are state-specific.
A conditional waiver is void if the payment does not clear. An unconditional waiver gives up the rights regardless. Lenders care which type they get, and at which moment.
Paying your general contractor does not protect you if the contractor skips the plumber. An unpaid subcontractor or supplier can still lien the property. Cornell Law School’s Legal Information Institute notes a mechanic’s lien can reach subcontractors and suppliers, not only the party who contracted with the owner. Its example is New York law, but the principle is why lenders collect waivers from every tier.
Primior warns that waiver forms and timing can be set by statute, so a generic form should not be assumed to work in every state. Use the form your lender and title company accept. Collect a waiver with every payment. Pay contractors in stages that match the draw schedule, and tell them up front you are financing with draws.
Inspection-Day Readiness
Most failed inspections are preventable. Before the visit, run through this list.
- Make sure the inspector can get in. Provide a lockbox or be there.
- Turn utilities on if the phase needs them.
- Label work areas so photos map to budget lines.
- Take dated photos in a consistent sequence, room by room.
- Keep the permit card and any approved change orders on site.
- Do not claim more than the work shows. Claim what is installed.
A clean report matches your request line by line. When your percent complete and the inspector’s agree, the release is routine. When they differ, expect a short draw.
When Inspections Fail, Stall, or Disagree
Some trouble is built into gut jobs. Demolition exposes problems nobody priced, and partial trade work is common. Here is how the usual problems play out.
| Problem | Typical cause | Fix |
|---|---|---|
| Partial draw | Inspector credits less than claimed | Finish the item, request re-inspection |
| Hidden conditions | Rot, old wiring, code upgrades | Get the change order approved first |
| Lien hold | New lien appears on title | Clear it, then resubmit |
| Permit hold | Inspection not passed | Fix notes, get sign-off |
| Paperwork gap | Missing or wrong waiver | Collect correct waivers |
Change orders deserve their own warning. Picture a gut job where demolition exposes rotted framing nobody priced. If the investor spends on the repair before the lender approves the change, the inspector may credit nothing for it, the draw comes up short, and the investor covers the gap with cash. Get the lender’s approval in writing before the money is spent.
Cost overruns are the larger version of the same problem. When hidden conditions push a phase past its approved line item, the inspector can only credit what the budget allows. The extra cost falls on you until the lender approves a reallocation or you cover it with your own cash. Keep a contingency line in the budget, and decide before demolition where the overrun money would come from. Lendmire’s piece How to Fund a Full-Gut Rehab Overrun on a Hard Money Loan covers those options in detail.
Photo Verification Versus In-Person Visits
Verification methods vary a lot by lender. Ask which one yours uses.
| Method | How it works | Where it fits |
|---|---|---|
| In-person inspection | Third party visits the site | Heavier scopes, open-wall phases |
| Photo or video review | Borrower sends dated media | Lighter scopes, later phases |
| Hybrid | One visit, media afterward | Mixed |
Some lenders do one physical visit around the midpoint and accept photos afterward. Others inspect every draw. A few fund an initial draw up front. None of these is the norm, and a lighter model on paper can mean less flexibility in practice. On a full gut, in-person visits are common at the rough-in stage because the evidence disappears behind drywall.
The Cash-Gap Math
Working capital is the real cost of a draw loan. You front a phase, then wait for inspection, title, and release. Delay also raises carrying costs, because a slow draw delays your contractor, which delays the whole renovation.
Here is an illustrative scenario with percentages only. Say the rehab budget is split into four phases at roughly 25% each. You pay the first phase, request the draw, and wait. Your peak exposure is about one phase of cost, plus whatever a short draw leaves unpaid. If the inspector credits only part of a phase, the gap grows. If a hidden condition adds cost the lender never approved, that cost is entirely yours.
A thin cash cushion is how otherwise good jobs stall. Cash reserves and a contingency line in the budget matter as much as the loan terms.
Interest is another variable. Practice differs on whether interest accrues on the full loan from closing or only on funds disbursed, so it is worth asking the lender how it works before committing.
Tax treatment varies; consult a qualified professional.
Where the General Rule Breaks
Too far gone to inspect. If the shell is stripped so far that phases cannot be evaluated, the project may fit ground-up construction financing better than a rehab loan. On Lendmire’s programs, ground-up construction runs up to 90% of cost and 75% of completed value at three or more completed projects. It also covers up to 10 units. Eligibility varies by lender, property, and experience.
Stored materials. Most lenders will not release money for materials sitting on site. Long-lead items like windows and cabinets are the usual argument. Ask in advance how your lender treats them, and do not assume.
Contractor changes. Swapping contractors mid-project can reset waivers and require a documented status inspection. Get the work-to-date recorded first.
The government contrast. The FHA 203(k) is a government rehab product, not hard money and not DSCR. It shows what strict draw rules look like. HUD’s borrower acknowledgment states a 10 percent holdback on each draw request for workmanship and lien protection. Private hard money loans are not bound by those rules. Your loan documents control.
Questions to Ask Before You Sign
- Do you inspect every draw, or only some?
- Is the inspector third party or staff, and who pays for re-inspection?
- Do you require title date-downs on each draw?
- How do you handle change orders and hidden conditions?
- Do you pay pro rata on partial work?
- Is interest charged on the full balance or only on funds drawn?
- Will you fund stored materials?
- Do you pay me, the contractor, or both?
- What does the final draw require?
Ask about the draw process as closely as you ask about leverage. A loan that looks generous can be painful if the draws drag.
Where This Fits in the Bigger Plan
For many investors, the hard money loan is a bridge. They finish the gut, rent the property, then refinance into long-term DSCR financing. Lendmire arranges that path through select lenders. To refinance well, the rehab needs to be finished, inspected, and free of liens. Open permits or an unfinished gut can block the takeout. Lendmire’s complete DSCR loans guide explains how the rental-income test works once you get there.
One caution belongs here. Clearing a coverage ratio is not the same as positive cash flow. DSCR compares rent to the full monthly housing payment, and repairs, vacancy, and management sit outside it.
Key Terms Defined
Draw: one release of renovation money after verified work.
Holdback: the part of the budget the lender keeps until the work is verified.
Scope of work: the line-item plan and budget approved at closing.
Percent complete: the share of a line item the inspector confirms is finished.
Lien waiver: a signed statement giving up the right to file a mechanic’s lien.
Change order: a documented, approved change to the scope or budget.
Title date-down: a title update that catches liens filed since the last check.
Frequently Asked Questions
Is an in-person inspection always required?
No. Some lenders send an inspector every draw, some do one visit at the midpoint, and some accept photos or video. On a full gut, in-person visits are common at rough-in. Ask your lender.
What if the inspector disagrees with my percent complete?
Expect a partial release based on the inspector’s number. Finish the open items, document them with dated photos, and request a re-inspection. Resubmitting with clear evidence is the cleanest way to settle the difference.
Do permit inspections count as lender inspections?
No. A permit inspection checks code compliance. A lender inspection checks that claimed work is done so money can be released. A gut rehab usually needs both, and a permit hold can stall a draw.
Can I be paid for materials before they are installed?
Generally not. Materials delivered but not installed typically do not count. Ask your lender about long-lead items before you order.
Why do I still need cash if the rehab is funded?
Because draws reimburse work already done. You front each phase, and short draws from scope changes add to the gap. Reimbursement timing alone makes working capital a real requirement.
Next Step
If you are buying, rehabbing or refinancing an investment property on a short timeline and want to see how the numbers work, Lendmire can help you compare hard money options based on the project, the exit plan, leverage, and your goals. Lendmire is a broker that arranges financing through select lenders across 41 markets, including Washington, D.C.
About Lendmire
Lendmire — NMLS# 2371349 — is a DSCR and non-QM mortgage brokerage with investor loan programs in 41 markets, including Washington, D.C. DSCR eligibility is commonly reviewed by the lender around property-level rent rather than personal income documentation, subject to lender guidelines, and the brokerage helps arrange financing for LLC-owned portfolios beyond conventional financed-property limits. Recognized by Scotsman Guide as a Top Mortgage Workplace in 2025 and 2026.
The exit plan matters as much as the purchase price on short-term financing – see the hard money loan overview.
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Informational only. Not a Loan Estimate, approval, or commitment to lend. Program availability and eligibility are subject to lender guidelines, credit approval, property review, and underwriting.
References
1. Primior – Construction Loan Draw Process Controls
2. YieldStack – Fix and Flip Loan Draw Schedule
3. Minnesota Attorney General – Mechanic’s Liens
4. Cornell LII – Mechanic’s Lien
5. HUD – 203(k). Borrower’s Acknowledgement
This article is part of Lendmire’s hard money loan program — full qualification details, guidelines, and scenarios live on the program page.
Related reading: Hard Money Rehab Draw Schedule and Inspection Requirements · Hard Money Rehab Draw Rules for a BRRRR Exit Into a DSCR Loan · Hard Money Overrun and Change Order Rules for the Draw Schedule
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
- Mortgage Loan Originator · NMLS# 1129696 · Verify on NMLS Consumer Access
- North Carolina Real Estate Broker · License# 343312 · Verify on NCREC
- North Carolina Insurance Producer · License# 19053198 · Property, Casualty, Life, Health · Verify on NAIC SBS
- Lendmire LLC · Firm NMLS# 2371349 · Verify firm licensure
Disclosures. The information presented in this article is general market commentary, not financial, legal, or tax advice. Lendmire is a mortgage brokerage (NMLS# 2371349) — not a direct lender or depository institution — and loan placement is subject to lender underwriting. Nothing in this content represents a commitment to lend. Loan terms, pricing, and program availability vary based on borrower qualifications, property characteristics, and state of subject property, and are subject to change at any time. Lendmire complies with Equal Housing Opportunity requirements. Consumer access: nmlsconsumeraccess.org.