Loan Origination Activities · 27% of the SAFE exameasy
Correct answer: A portion of the loan proceeds set aside to cover interest payments during construction so the borrower avoids out-of-pocket interest costs
During construction, the borrower typically doesn't make full P&I payments — but interest still accrues on disbursed funds. The interest reserve is a portion of the loan set aside at closing specifically to pay that accruing interest. Without it, the borrower would need to make interest payments out-of-pocket while also potentially paying rent elsewhere. The interest reserve is not a prepaid finance charge; it's a built-in mechanism to manage cash flow during the build period.
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