Construction Draw Schedule: How Disbursements Work

Construction loans are fundamentally different from permanent mortgages. The borrower does not receive the full loan amount at closing; instead, funds are released in stages as construction milestones are verified.

How Draws Are Structured

Most construction lenders divide the loan into four to six draws tied to specific completion milestones. A typical schedule looks like: draw one after foundation is poured, draw two after framing is complete, draw three after rough mechanical (plumbing, electrical, HVAC) is roughed in, draw four after drywall and insulation, draw five after interior finish, and final draw at certificate of occupancy. The exact milestone structure varies by lender and project type.

The Inspection Process

• ✦Before each draw, the lender orders an inspection by an approved third-party inspector or appraiser
• ✦The inspector confirms the work billed in the draw request has been completed satisfactorily
• ✦The inspector also verifies the percent-complete figure to ensure the draw amount does not exceed the value of completed work
• ✦Lenders typically retain 10% of each draw as a holdback until final inspection and lien waiver collection
• ✦Mechanics lien waivers from all subcontractors and suppliers must accompany each draw request to protect the lender's lien priority

Interest Reserves and Cost Overruns

During construction, the borrower typically makes interest-only payments on amounts drawn, not on the full loan commitment. Some lenders build an interest reserve into the loan to cover these payments so the borrower does not need to make out-of-pocket payments during the build period. Cost overruns are the largest risk: the builder runs over budget, the draw schedule is exhausted, and the project stalls. Lenders mitigate this by requiring a 10% contingency in the construction budget and by limiting draws to the lesser of the draw request or the appraised as-built value.