Construction loan draws work by releasing your loan money in stages as the house gets built, rather than in one lump sum at closing. A typical residential project is divided into four to six draws, and each one is paid only after the builder completes a defined milestone, submits paperwork documenting the work, and passes a lender-ordered inspection. You pay interest only on what has actually been disbursed, so the loan grows in cost as the house grows in size.
The mechanics behind that simple idea are where most borrowers get caught off guard. Here is how the draw process actually moves from the schedule your lender sets at closing to the final check that closes out construction.
The Draw Schedule Sets Everything in Motion
The draw schedule is the financial blueprint you and the lender agree on before construction starts. It maps out how much money gets released at each stage and what work must be verified before funds move. Lenders build this schedule from your contractor’s detailed cost breakdown, dividing the total loan into portions that match major construction milestones.
A typical residential schedule includes five or six draws, each representing roughly 15% to 25% of the total loan. One common breakdown:
- Draw 1, foundation and site work: about 20%, covering excavation, grading, and the concrete pour.
- Draw 2, framing and roof: about 25%, released once the structural skeleton and roof sheathing are complete.
- Draw 3, mechanical rough-in: about 20%, covering plumbing, electrical, and HVAC before walls close up.
- Draw 4, interior finishes: about 20%, for drywall, flooring, cabinetry, and painting.
- Draw 5, final completion: about 15%, released after punch-list items are done and the certificate of occupancy is issued.
Some lenders use a percentage-of-completion model instead of fixed milestones. Under that approach, a third-party inspector estimates how far along the overall project is, and the lender releases funds matching that percentage. The milestone model is more common for straightforward residential builds. Percentage-of-completion shows up more often in commercial or custom projects where the work doesn’t follow a predictable sequence.
The schedule you sign at closing is the contract that governs every payment that follows. If the sequence of work on site diverges from the sequence on the schedule, draws will not line up with payroll, and your builder will be fronting money while waiting for the paperwork to catch up.
Your Down Payment Gets Spent Before Loan Funds Flow
Most construction lenders require 20% to 25% down, based on the appraised value of the completed home rather than the cost to build. The detail that trips people up: your cash goes in first. The lender expects you to contribute your equity before releasing any draws. If the project costs $400,000 and you’re putting 20% down, your $80,000 covers the earliest expenses. Lender draws do not start flowing until your portion has been spent.
This “borrower funds first” structure means your out-of-pocket costs hit hardest at the beginning of the project. Land acquisition, site preparation, permits, and often the initial foundation work come straight out of your pocket. Once your equity is exhausted, the lender begins releasing draws according to the schedule. Plan for large checks in the first weeks of construction, before the loan machinery kicks in.
What a Draw Request Actually Contains
Every draw request requires a documentation package that proves the work was done, the money is going where it should, and no one can file a lien against your property for unpaid bills.
Payment Application Forms
The industry-standard forms are AIA Document G702 (Application and Certificate for Payment) and AIA Document G703 (Continuation Sheet). The G702 is the summary page showing the total contract amount, work completed to date, retainage withheld, prior payments, any change orders, and the current amount requested. The G703 breaks that total into individual line items matching the original budget, so the lender can see exactly how much was allocated to framing versus how much has been billed so far.1American Institute of Architects. Summary G702-1992 Application and Certificate for Payment The architect reviews both forms and certifies whether the payment amount is justified, which adds a layer of professional verification before the request reaches the lender.
Every dollar on these forms should tie to an invoice or receipt from a subcontractor or materials supplier. Round-number estimates in place of documented costs invite rejection or time-consuming reconciliation.
Lien Waivers
Lien waivers protect you from the scenario where your general contractor gets paid but doesn’t pay a subcontractor, and that subcontractor files a mechanic’s lien against your property. Two types come into play with each draw. A conditional lien waiver is signed before payment goes out and says the signer waives lien rights once the check clears. An unconditional waiver is signed after the money has been received, confirming the sub was paid in full for that phase. Lenders require both types at the appropriate stages because a lien filed during construction can freeze the entire draw process.
Soft Costs
Not every draw covers physical construction. Architectural fees, engineering studies, building permits, legal costs, and project management fees are soft costs. Most pile up during the predevelopment phase before any dirt gets moved. Your lender’s draw schedule should specify which soft costs are eligible for reimbursement and when they can be submitted. If the budget doesn’t account for soft costs as separate line items, you may need to absorb them out of pocket.
Inspection and Funding Timeline
Once you submit the full package, the lender sends a third-party inspector to the site to verify the work matches what’s described on the forms. The inspector walks the property, checks progress against the draw schedule, photographs key elements, and writes a report confirming whether the milestone has been met. Inspection fees vary by market and project size and are typically deducted from the loan proceeds rather than billed separately.
From the time you submit a complete draw request with all documentation, expect roughly 7 to 10 business days before funds land in the builder’s account. That timeline assumes no problems. Missing paperwork, inspection discrepancies, or incomplete work can push it longer. Some lenders fund draws on fixed calendar dates regardless of when the inspection was approved, which can add another week of waiting. Others wire money as soon as approval clears. Ask your lender about their funding cadence before construction starts, because a two-week gap between finishing work and receiving payment can create real cash-flow pressure for your contractor.
Funds are usually sent by wire transfer directly to the builder’s account. Some lenders issue a joint check payable to both the builder and a major subcontractor or materials supplier, ensuring the money reaches the party that did the work.
Retainage and Contingency Reserves
Two pots of money sit outside the normal draw flow and shape how much actually reaches the builder on each payment.
Retainage is a portion of each draw, typically 5% to 10%, that the lender withholds until the entire project is finished. It acts as a performance guarantee. If the contractor walks off the job with the last bathroom half-tiled, the lender still has money in reserve to pay someone else to finish. Retainage gets released only after final inspection, punch-list completion, and any required certificate of occupancy.
The contingency reserve is a separate cushion built into the loan budget for cost overruns. The standard range is 5% to 10% of the total project cost for straightforward builds, climbing to 15% or higher for complex custom homes or projects with unusual engineering. The reserve exists for the moments when the plumber hits rock where the plans showed soil, or lumber prices spike mid-build. Burning through contingency early in the project is one of the clearest red flags a lender can see, and it often triggers closer scrutiny of every draw that follows.
Interest Only, and Only on What You’ve Drawn
Construction loans charge interest only on the money that has actually been disbursed, not the full loan commitment. If your loan is for $500,000 but only $100,000 has been drawn, you pay interest on $100,000. As each draw increases the outstanding balance, your monthly payment rises. To estimate any month’s payment, multiply the outstanding balance by your annual interest rate and divide by 12. On a $300,000 balance at 8%, that comes to $2,000 per month.
During the construction phase, payments are interest-only. You’re not paying down any principal, and the full loan balance stays intact until the build is complete and you either refinance or convert to a permanent mortgage. This escalating structure means your cheapest months come at the beginning and your most expensive months hit right when you’re also paying for final finishes and landscaping. Budget for the peak payment, not the first one.
If you’re building a home you plan to live in, the IRS lets you treat a home under construction as a qualified home for up to 24 months, starting any time on or after the day construction begins. The interest you pay during the build may be deductible as home mortgage interest, provided the home becomes your primary or second residence when it’s ready for occupancy.2Internal Revenue Service. Publication 936 Home Mortgage Interest Deduction
Insurance Must Be in Place Before Draws Start
Lenders won’t release funds into a project that isn’t insured. The key policy is builder’s risk insurance, which covers the structure and materials against fire, storms, theft, and vandalism during construction. Standard property insurance policies exclude buildings under construction, so this is a separate policy you or your contractor must carry. Fannie Mae’s guidelines require builder’s risk coverage equal to at least 100% of the completed value of the project.3Fannie Mae Multifamily Guide. Builders Risk Insurance Requirements Your lender may also require general liability coverage from the contractor and proof of workers’ compensation insurance before approving any draws.
Builder’s risk policies typically run for the duration of construction and expire when you obtain your certificate of occupancy. If the build takes longer than expected, extend the policy. The lender will check for active coverage before releasing later draws, and letting the policy lapse mid-build is a fast way to get your next draw frozen.
Why Draws Get Rejected or Frozen
Draw requests don’t always sail through. The most straightforward rejection happens when the inspector shows up and the work described in the request isn’t actually finished. Submitting a draw for “framing complete” when half the second floor is still open studs sends the paperwork straight back.
Less obvious problems include depleting the contingency reserve too early, which signals that costs are out of control. Excessive change orders that push the project well beyond its original scope raise similar alarms, because each one needs lender approval and documentation before the affected draw can move forward. Code violations or stop-work orders from the local building department will freeze draws until the issue is resolved. So will major personnel changes like swapping out the general contractor mid-build, because the lender underwrote the project based on the original builder’s qualifications and financial stability.
In the worst case, the lender can declare a default and terminate its obligation to make further draws. Standard construction loan agreements give lenders this right when construction falls significantly behind schedule, when work quality fails inspection, or when the borrower breaches the loan terms.4SEC.gov. Construction Loan and Security Agreement Once a lender terminates draw obligations, you’re left financing the remainder of construction out of pocket or finding a new lender willing to step into a partially completed project.
Change Orders Ripple Through the Draw Schedule
Almost every project generates change orders. The homeowner upgrades the countertops, the engineer requires a deeper foundation, or a materials shortage forces a substitution. Each change order that increases costs needs to be absorbed somewhere in the budget, and if the contingency reserve can’t cover it, the draw schedule itself may need to be restructured.
Lenders require detailed documentation and approval for each change order before adjusting the draw amounts. Delays in that approval push back the next draw, which delays contractor payments, which slows work on the site. The financial effect compounds: a longer build means more months of interest-only payments, and if you’re in a single-close construction-to-permanent loan, you’re burning through the construction window the lender set at closing. Keep change orders to a minimum, and when they’re unavoidable, document and submit them to the lender immediately rather than batching them at the next draw.
The Final Draw and Loan Conversion
The last draw marks the transition from building mode to living-in-it mode, but the loan still has one more step. If you have a construction-to-permanent loan, the lender requires confirmation that the home is truly complete before converting to permanent financing. The standard requirements include a certificate of occupancy from the local building authority, a final inspection confirming all punch-list items are done, and a completion appraisal. Fannie Mae uses Form 1004D (Appraisal Update and/or Completion Report) for this purpose.5Fannie Mae. Construction-to-Permanent Financing Fannie Mae’s single-close option allows a construction period of up to 18 months, with no single stretch exceeding 12 months.6Fannie Mae. Conversion of Construction-to-Permanent Financing: Single-Closing Transactions
Once conversion happens, interest-only payments end and you start making regular principal-and-interest payments at the rate locked in at closing. If instead you have a construction-only loan, the full balance comes due at the end of construction, and you need a separate permanent mortgage ready to pay it off. If rates have risen since you started building, that refinance can be significantly more expensive than you originally planned.
Getting to that final draw as efficiently as possible comes down to the same habits that govern every draw before it: keep documentation current, manage change orders tightly, maintain active insurance, and keep communication open with both your builder and your lender.