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How are contingency reserves handled in construction-loan draws?
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When a construction loan requires a contingency reserve, how is that money usually held and released? I’m trying to understand whether it counts toward the borrower’s required equity, or whether it’s separate from the cash needed to cover overruns.
There’s also a timing question: if a change order pushes costs above the original budget, does the lender typically approve a revised draw, require the borrower to contribute more first, or handle it another way? I know lender rules vary, so I’d be interested in how people distinguish the lender’s reserve requirement from a separate cash cushion in the build budget.
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The equity accounting is the part I’d pin down in the loan documents. A contingency reserve is a source of funds, not automatically borrower equity: the documents should say who funds or holds it and whether using it counts toward the borrower’s required contribution. If a change order exceeds the eligible reserve still available, ask how the lender wants the revised budget to show where the gap will come from; the lender’s rules determine whether additional borrower funds are needed before approving a draw.
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