Construction loan draws are the scheduled disbursements a lender makes from a construction loan as the project progresses, releasing money in portions tied to verified milestones rather than handing over the full loan amount at closing. Each draw requires the borrower or general contractor to document completed work, submit supporting paperwork, pass a site inspection, and clear a lender review before funds are wired. The structure keeps interest costs down, protects the lender’s collateral, and creates a running check against overbilling.
The Schedule of Values Sets the Framework
Every draw traces back to the Schedule of Values, a line-by-line breakdown of the project budget with a dollar amount assigned to each work category: foundation, framing, plumbing, electrical, roofing, finishes, and so on. It’s the financial blueprint the lender uses to measure how much of each category has been completed against how much money has been released for it.
Getting this document right at the start matters more than most borrowers realize. If a contractor front-loads costs into early phases, the lender’s inspector will flag the mismatch. If later phases are underestimated, you can end up short when expensive finish work begins. The lender reviews the Schedule of Values before approving any draws, so adjustments then are simple. Changing it midway through construction invites delays and heavier scrutiny on every request that follows.
What Goes Into a Draw Request
When a phase of work reaches a billable milestone, the contractor assembles a draw request package. Most lenders expect the format the American Institute of Architects established, built around two forms. The G702 Application and Certificate for Payment is a one-page summary showing the original contract sum, approved change orders, total work completed and stored to date, retainage withheld, and the current payment requested. The G703 Continuation Sheet breaks all of that into individual line items that mirror the Schedule of Values, so the lender can see which portions of work justify each dollar requested.
Supporting invoices and receipts from subcontractors and suppliers round out the package. Each invoice should tie directly to a line item on the Schedule of Values so underwriters can trace every dollar back to actual work or materials. Vague or lump-sum invoices without clear line-item connections are one of the most common reasons packages get kicked back before an inspection is even scheduled.
Lien Waivers
Lien waivers are the legal documents that protect the property from mechanics’ liens, which subcontractors or suppliers can file if they aren’t paid. Lenders require them with every draw because releasing funds without them could leave the property burdened by claims that threaten the lender’s collateral.
Two versions come into play. Conditional lien waivers are submitted with the draw request and take effect only when payment actually clears. That solves the timing problem: the subcontractor agrees to waive lien rights, but only once the money arrives. After funds are distributed, lenders require unconditional lien waivers confirming the obligation for that draw period is fully settled. The unconditional version takes effect the moment it’s signed regardless of whether payment has arrived, so contractors should sign only after the money is in hand.
Soft costs like architectural fees, permits, insurance, and legal work go through a parallel process. Because no inspector can verify that an architect did their work, the lender relies on paid invoices, proof of payment, and lien waivers. Some lenders tie soft cost disbursements to hard cost progress, releasing soft cost funds only up to the same completion percentage as the physical build.
Inspection, Review, and Funding
Once the package is complete, the borrower submits it through the lender’s preferred channel, usually a secure digital portal, occasionally by email to a designated loan officer. An incomplete submission stalls everything. A single missing lien waiver or an invoice that doesn’t line up with the Schedule of Values is enough for the lender to send the package back without scheduling anything else.
The Site Inspection
After the paperwork clears, the lender arranges a site inspection. Some lenders use internal employees; others hire a third-party inspection service. Either way, the inspector visits the site, photographs progress, and compares what’s physically built against the completion percentages in the draw request. If the G703 claims framing is 60% complete, the inspector needs to see roughly 60% of the framing standing. This is the lender’s primary defense against overbilling. Inspection fees typically run $100 to $200 per visit for a single-family project, and the borrower usually pays them.
Lender Review and Wire
After the inspection, the lender reconciles the inspector’s findings with the submitted paperwork. A central piece of this review is the loan-in-balance test: the lender confirms that the remaining undisbursed loan funds are still enough to cover the remaining cost to complete the project. If costs have crept up or work is behind schedule, the loan can fall out of balance, and the lender may require additional equity from the borrower before releasing the draw.
The lender also confirms that no new liens have been recorded against the property since the last disbursement. If everything clears, the bank authorizes the release, typically by wire transfer. The general contractor then distributes the funds to the subcontractors and vendors who performed the work covered by that draw. From inspection to money-in-account, the process generally takes five to ten business days, though larger or more complex projects can push that timeline longer. Staying in regular contact with your loan officer helps catch clerical errors before they turn into week-long delays.
How Interest Accrues on Disbursed Funds
One of the borrower-friendly features of construction loans is that interest accrues only on the funds already disbursed, not on the full loan commitment. If you have a $500,000 construction loan and the lender has released $120,000 through two draws, your monthly interest is calculated on that $120,000. As each new draw funds, the interest-bearing balance climbs. Early-stage carrying costs stay manageable, which matters because construction projects generate no income until the building is finished and either sold, rented, or occupied.
For investment or commercial projects, the IRS generally requires you to capitalize interest paid during construction rather than deducting it as a current expense. Under the uniform capitalization rules, direct and indirect costs of producing real property, including interest paid during the production period, must be added to the property’s cost basis rather than written off in the year paid.1Office of the Law Revision Counsel. 26 USC 263A – Capitalization and Inclusion in Inventory Costs of Certain Expenses This applies to real property and to any project with an estimated production period exceeding two years, or exceeding one year with costs above $1,000,000. The capitalized interest becomes part of your depreciable basis once the property is placed in service. Construction loan interest on a primary or secondary home you’re building for yourself may instead qualify as deductible mortgage interest, subject to the same limits that apply to acquisition indebtedness.
Retainage Held Back From Each Draw
The lender or owner withholds a percentage of every approved draw as retainage, a reserve held back until the project is fully complete. Historically the standard holdback was 10% of each payment. Over the past several decades a growing number of states have passed laws capping retainage at 5% or less, and the trend keeps pushing that number down.2Foundation of the American Subcontractors Association, Inc. 50 State Retainage Law – New Language Depending on the state and the contract, retainage typically lands somewhere between 5% and 10%.
The purpose is leverage. Retainage gives the owner and lender something to withhold until the contractor finishes every punch-list item, corrects defects, and doesn’t walk off the job after the bulk of the money has been paid. If a contractor abandons the project or refuses to fix problems, the withheld funds can be redirected to hire someone else.
Retainage is typically released after the project reaches substantial completion, usually documented through the issuance of a certificate of occupancy by local building authorities. Before releasing the funds, the lender verifies that all final lien waivers have been collected and that no outstanding claims exist. State laws govern the maximum percentage and the timeframe within which retainage must be paid out, so the specific rules depend on where the project is located.
Change Orders and Contingency Reserves
Almost no project finishes without change orders, which are modifications to the original scope, materials, or design that adjust the contract price. A homeowner upgrades the countertops. Excavation reveals unexpected rock. The architect redesigns a wall after framing has started. Each of these adjusts the Schedule of Values, and that changes every future draw request.
The lender needs to approve significant change orders before the revised work is eligible for a draw. Approval involves documenting the scope change, its cost, and any effect on the timeline. The lender then reruns the loan-in-balance test on the new numbers. If a series of change orders pushes the total project cost above the original loan amount, the borrower may need to contribute additional equity to bring things back into balance.
Contingency reserves absorb this pressure. Most lenders require a contingency fund built into the construction budget for unexpected costs. The required percentage varies by lender and project size, but 10% to 15% of the construction contract is common. Unused contingency is either applied to the loan balance when construction wraps up or returned to the borrower, depending on how it was funded. Underfunding the contingency is one of the most reliable ways to run into a cash crunch mid-build.
When a Draw Is Denied
Draw requests get rejected more often than borrowers expect. The most common triggers are documentation problems: missing lien waivers, invoices that don’t match the Schedule of Values, or completion percentages that don’t square with what the inspector found on site. Inaccurate progress reports and missed timelines also raise flags that can freeze disbursements.
A denied draw creates immediate cash flow pressure. Subcontractors and suppliers expect payment on their schedule regardless of what’s happening between borrower and lender. If funding stalls, subcontractors may stop work or file mechanics’ liens against the property, which is exactly the kind of encumbrance that makes the next draw harder to approve. A pattern of denials or prolonged funding gaps can push the loan into technical default, which hands significant power to the lender. At that point, the lender can freeze the remaining credit, accelerate repayment of the entire balance, impose higher interest rates, or take control of project decisions. In the worst cases, default leads to foreclosure, contractor lawsuits, and the loss of borrower equity.
The best defense is prevention. Keep documentation airtight, don’t overstate completion percentages, and stay in front of the lender and inspector on anything unusual. If a draw is partially denied, fix the deficiency right away rather than waiting for the next cycle. Small problems here compound fast.
Ending the Draw Period
The draw period doesn’t last forever. Once construction is complete, the loan transitions into long-term financing, and how that happens depends on the loan structure.
With a single-close construction-to-permanent loan, the conversion is built into the original documents. The construction phase operates as a temporary, interest-only period, and on completion the loan automatically converts to a standard amortizing mortgage with the permanent terms fixed at closing. The construction period for these loans generally cannot exceed 18 months total, and the permanent mortgage term cannot exceed 30 years after conversion.3Fannie Mae. Conversion of Construction-to-Permanent Financing: Single-Closing Transactions
With a two-close structure, the construction loan is a separate obligation that has to be paid off and replaced with a new permanent mortgage. That means a second round of closing costs, a new appraisal, and potentially re-underwriting based on the borrower’s financial picture at the time of conversion. If property values have dropped or credit has changed during construction, qualifying for the permanent loan can become harder.
Either way, all improvements must be fully completed before the loan can convert or be sold on the secondary market. The lender needs evidence construction is finished, typically a final inspection, a certificate of occupancy, and confirmation that all lien waivers are collected and no outstanding claims remain.4FDIC. Freddie Mac Construction Conversion and Renovation Mortgage The file also needs documentation supporting actual construction cost, including contracts, invoices, and settlement statements from both the interim and permanent closings. If major changes occurred during construction, such as significant cost overruns, scope changes, or shifts in property value, the loan may need to be fully re-underwritten before conversion is approved.