Construction loan draws are staged disbursements: instead of handing over the full loan at closing, the lender releases money in chunks tied to specific building milestones, and you pay interest only on what has actually been disbursed. Your balance climbs as the house goes up, and your monthly interest payment climbs with it. Every draw has to be requested, documented, and verified by an inspector before any money moves, so understanding the sequence is the difference between a build that stays on schedule and one that stalls waiting on paperwork.
How the Draw Schedule Works
The draw schedule is the map the lender, builder, and borrower all work from. It splits the total construction budget into phases, and each phase is tied to a percentage of the loan. A common breakdown looks roughly like this:
- Foundation work, including site preparation, grading, footings, and the pour, at around 15–20% of the construction budget.
- Framing and sheathing, usually the largest single draw at 25–30%.
- Dry-in: roof, windows, and exterior doors to make the structure weathertight, roughly 10–15%.
- Mechanical rough-in for plumbing, electrical, HVAC, and insulation, about 15–20%.
- Interior finishes such as drywall, cabinets, flooring, paint, and fixtures, another 15–20%.
- Final completion, including punch list items, final inspections, and the certificate of occupancy, before the last draw is funded.
Those percentages aren’t arbitrary. Each draw is sized so that the value of completed work on-site always exceeds the amount already disbursed. If the project stalls, the partially finished structure plus the land should cover the outstanding balance.
Not every draw pays for physical construction. Architectural fees, engineering, permits, and insurance premiums are treated as soft costs, and many lenders will release draws for those expenses before ground breaks. The verification is different: hard costs get confirmed by a site inspection, soft costs by paid invoices and proof of payment. Some lenders release soft cost draws in proportion to hard cost progress so that the soft-cost spending doesn’t outrun the physical build.
What You Have to Submit for Each Draw
A phone call saying framing is done won’t move money. Every draw request needs a paper trail.
The standard forms are the American Institute of Architects G702 and G703. The G702 is the summary application: total contract amount, work completed to date, retainage withheld, previous payments, change orders, and the current request. The G703 is the line-by-line backup showing each task, its budgeted value, and how much of it has been finished.1AIA Contract Documents. Top 5 Questions About AIA G702 and G703 Payment Applications
Lien waivers come next. Every subcontractor and material supplier involved in the billing cycle signs a waiver stating they’ve been paid and give up the right to file a claim against the property for that amount. Conditional waivers are standard for the current draw because payment hasn’t cleared yet; unconditional waivers are required for prior draws to confirm those earlier payments were actually received. Skipping this step is how properties end up with surprise liens from unpaid subcontractors even when the borrower already paid the general contractor.
The lender will also require proof of active builder’s risk insurance covering fire, storms, vandalism, and similar hazards during construction. Fannie Mae guidelines require builder’s risk coverage of at least 100% of the completed property value.2Fannie Mae Multifamily Guide. Builders Risk Insurance If the policy lapses, draws freeze until it’s reinstated.
How a Draw Gets Approved and Funded
Once the draw request and supporting documents are submitted, the lender orders a third-party inspection. The inspector visits the site and compares physical progress against the percentages claimed on the G703. If the paperwork says framing is 100% complete but the garage walls aren’t up, the approved amount is reduced to match what’s actually there. Inspections typically run $100 to $150 per visit, and the fee usually falls to the borrower.
After the inspection clears, funds are released within a few business days, most often by wire transfer to the builder’s account. Some lenders issue joint checks payable to both the contractor and the borrower as an added control. The process feels bureaucratic, but it’s what keeps the loan balance aligned with the value of what’s actually been built.
How Interest Accrues as Draws Release
This is where a construction loan diverges most sharply from a traditional mortgage. Interest accrues only on the disbursed balance, that balance grows with each draw, and payments during construction are interest-only, so nothing you pay reduces principal.
The math is straightforward once you see it in numbers. Take a $400,000 construction loan at 8.25% (a 6.75% prime rate plus a 1.5% lender margin). After a first draw of $70,000 for the foundation, monthly interest is roughly $70,000 × 0.0825 ÷ 12, or about $481. Three months later, with the outstanding balance at $200,000, the payment climbs to around $1,375. Once the full $400,000 has been drawn, the monthly interest sits near $2,750.
The rate on most construction loans floats, tied to prime plus a margin. If the Federal Reserve raises rates mid-build, your interest cost rises immediately, and there’s no cap on how much that can add to the total project. A one-percentage-point increase on a $400,000 fully drawn balance runs about $333 more per month. Over a 12-month build, that’s roughly $4,000 you didn’t budget for.
Some construction loans include an interest reserve, a portion of the loan set aside specifically to cover interest payments during the build. The lender pulls from the reserve instead of billing you each month. It helps cash flow, but you’re effectively borrowing money to pay interest on borrowed money, and the reserve adds to the balance you’ll eventually repay or roll into the permanent mortgage. USDA construction-to-permanent loans, for example, allow the reserve to include up to 12 months of loan payments during construction.3USDA Rural Development. Single Family Housing Guaranteed Loan Program Overview – 101
Retainage: Money Held Back From Every Draw
Most construction loan agreements include a retainage clause that withholds a percentage of each approved draw, typically 5% to 10%, until the project is finished. That holdback creates a pool of money protecting you if a contractor walks off the job or subcontractors go unpaid. The retained funds aren’t released until final inspection confirms the work is complete, all lien waivers are collected, and outstanding issues are resolved. When budgeting the build, remember that your contractor won’t see that last slice of each payment until the very end.
Contingency Reserves and Cost Overruns
Construction budgets rarely survive contact with reality. Material prices shift, site conditions turn up surprises, and design changes cost money that wasn’t in the plan. Most lenders build a contingency reserve into the loan, typically up to 10% of construction costs, that sits untouched unless actual costs exceed the budget for a specific line item.4USDA Rural Development. Combination Construction to Permanent Loans
When costs blow past the contingency, the situation gets uncomfortable fast. Federal lending guidance is direct on the point: unless the budget includes a contingency to absorb change orders, the borrower should pay unexpected overruns out of pocket rather than pulling from other budget line items, because raiding one line item to cover another may leave the project short of funds to finish. If interest costs also exceed the budgeted amount because of rate increases or delays, the borrower is expected to fund those payments personally.5National Credit Union Administration. Construction and Development Loans – Examiners Guide Set a personal cash cushion beyond what the loan contingency provides; a single lumber price spike can burn through 10% quickly.
What Happens If the Build Runs Long
Construction loans have hard deadlines, typically 12 to 18 months. Missing that deadline is a default under most loan agreements, and the lender can freeze further draws and, in principle, begin foreclosure on a half-finished house. In practice, lenders prefer to avoid foreclosing on incomplete structures because they’re hard to sell, so the more common outcome is a modification or extension at a cost. Extension fees typically run around 0.50% of the loan for a 90-day extension. On a $400,000 loan that’s $2,000 for three extra months, and many lenders limit you to a single extension.
The compounding effect is real: delays add interest, which eats contingency, which tightens the budget further. Padding the construction timeline by two to three months when the loan term is negotiated costs nothing upfront and can save thousands if the schedule slips.
Converting to the Permanent Mortgage
When construction wraps up, the loan has to transition into standard amortizing mortgage payments. With a single-close construction-to-permanent loan, that happens automatically: interest-only payments end and the loan starts amortizing at the rate locked at closing. The lender will require a certificate of occupancy from the local building authority and a final appraisal confirming completed value, and all construction liens must be satisfied before the loan can be delivered to the secondary market.6Fannie Mae. Conversion of Construction-to-Permanent Financing: Overview
With a two-close structure, none of that is automatic. You apply for a separate permanent mortgage after the build is done, which means a fresh credit check, new underwriting, another set of closing costs, and a rate based on market conditions at that moment rather than at groundbreaking. If rates have risen substantially during a 12- to 18-month build, the permanent payment can be meaningfully higher than the number you planned around.