What is a draw in hard money loan?
A draw in a hard money loan is a payment made by the lender to the borrower to cover the costs of renovations or other expenses related to the property being used as collateral for the loan.
Hard money loans are often used for short-term financing, such as flipping houses or rehabilitating properties. In these cases, the borrower may need to make renovations or other improvements to the property in order to increase its value. A draw allows the borrower to access funds from the lender as needed to cover the costs of these improvements.
Draws are typically made in stages as the work on the property progresses. The borrower may need to submit invoices or other documentation to the lender to demonstrate that the funds are being used for the intended purpose. The borrower may also be required to provide updates on the progress of the renovations or other work.
The draw process typically works as follows:
The borrower submits a request for a draw to the lender, along with documentation of the expenses being incurred.
The lender reviews the request and verifies that the expenses are reasonable and necessary for the renovation project.
If the request is approved, the lender releases the funds to the borrower.
The borrower uses the funds to pay for the renovations or other expenses related to the property.
It's important to note that draws are typically made in addition to the regular loan payments, which may include interest and principal. Borrowers should carefully consider the terms of the loan and the timing of the draws to ensure that they can afford the payments and stay on track with the repayment schedule.