Fund Control: The Construction Loan Gatekeeper

In recent years, demand for construction loans has been steadily increasing. This is mainly due to an increased demand for housing and a lack of available inventory. While experienced builders are familiar with the complexity of planning, budgeting, and borrowing, investors new to ground-up construction should know a few things before taking out a loan.

Construction loans don’t work quite like a typical mortgage. The money isn’t handed over all at once—and that’s a good thing for both borrower and lender. To keep your project on track (and your lender sleeping at night), construction loans include two important features you’ll want to understand: Fund control and Holdback.

Don’t worry—they sound more intense than they are. Let's break it down.

What Is Fund Control?

Fund control is a risk mitigation process lenders use to manage how and when construction funds are disbursed. Think of it like a bouncer at a nightclub – you don’t get in (or get your money) unless certain things check out. You won’t receive the full loan amount up front—instead, the money is released in stages called “Draws”. This ensures that funds advanced are only utilized to improve the value of the asset used as collateral for the loan.

"Funds advanced from the holdback account are on a reimbursement basis. This means the borrower/builder must self-fund the intital materials and labor costs needed to complete each draw before requesting reimbursement from the loan's construction holdback account. "

What’s a Holdback?

Now, let’s talk about the Holdback, which is a fancy way of describing the unadvanced proceeds of the loan that are reserved to fund the construction or improvements to the property; the reserve account is called a Holdback account. It’s important to note that funds advanced from the holdback account are on a reimbursement basis. This means the borrower/builder must self-fund the initial materials and labor costs needed to complete each draw before requesting reimbursement from the loan's construction holdback account. This ensures all subcontractors are paid and funds are not mismanaged.

Here's How It Works:

Let’s say your total loan is $800,000. Your budget to build is $500,000. At loan closing, the lender advanced you $300,000 ($800,000 - $500,000). You’ve now completed the grading and foundation work and are you’re ready for your first draw—$50,000.

1. You submit your first draw request for $50,000.

2. The fund control team begins its due diligence process to approve the draw.

   • An inspector is sent to the site to verify the work has been completed, and the product is onsite and installed.

   • Verification of payment for materials and labor is completed by reviewing paid invoices, copies of checks, and/or bank records.

   • Costs are matched against the initial budget provided.

   • Signed lien waivers from each subcontractor involved in work related to the draw are reviewed to ensure all contractors have been paid.

3. The first draw is approved, and the lender wires you $50,000.

This repeats throughout the life of the build, draw-by-draw, phase-by-phase.

Why Lenders Do This:

• To avoid the mismanagement of loan funds and ensure the value of the asset is improving with each drawn advance

• To keep the project within the proposed budget

• To make sure all contractors and suppliers are paid (avoiding mechanics’ liens—legal claims against the property for payment of services)

• To reduce the risk of loss from product theft on the job site

Why This Is Good News for You?

Sure, it might feel a little strict, but this helps to protect you as much as the lender.

• Interest cost is reduced. You only pay interest on the balance of funds advanced at each draw, not the whole loan amount (non-Dutch interest)

• Subcontractors and vendors are paid on time

• You stay on budget, stay organized, and reduce the chance of delays or legal issues.

In short, it’s structure that promotes your success!

Final Thoughts

In construction, surprises are inevitable, your loan shouldn’t be one of them. When seeking a loan, you’re not just getting money, you’re hiring a team and process built to keep you on track and on budget. These aren’t just accounting procedures; they’re tools that create trust, promote transparency, and help everyone sleep better at night (especially your lender).

Need a partner to help structure your next deal? Let’s build it together!

If you'd like to learn more about available financing options for investment opportunities you may be considering, inquire at info@brenance.com, and one of our experts will assist you. *All financing options available are investment-purpose only; the real estate securing the loan must be non-owner occupied.