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How Do Construction Loan Draws Work?

How money actually moves during a build, and why your payment grows month over month.

A construction loan doesn't hand you the money. It releases it in stages, called draws, as work is completed and verified. Understanding this removes most of the confusion people have about construction financing.

The sequence

  1. Work in a defined phase is completed
  2. The builder submits a draw request for that phase
  3. The lender sends an inspector to confirm the work is actually in place
  4. The lender releases funds, usually to the builder
  5. Interest begins accruing on that newly drawn amount

Repeat through the build. Draw schedules commonly break the project into phases like foundation, framing, rough-in mechanicals, drywall, finishes, and completion, though the exact structure varies by lender.

Why your payment grows

You pay interest only on what has been drawn, not on the full loan amount. Early in the build very little has been drawn, so the payment is small. By the final months most of the loan is out and the payment is near its peak. Budget for the end of the build, not the beginning, especially if you're also paying rent or an existing mortgage.

Things that catch people out

  • Lender inspection fees. Some lenders charge per draw. Ask up front how many draws and what each costs.
  • Draw timing. There's a gap between request and funding. Ask how long, because it affects how the build cash flows.
  • Retainage. Some lenders hold back a percentage until final completion.
  • Lien waivers. Lenders typically require them from subcontractors before releasing funds. This is a protection for you.
  • Change orders. A change that increases the contract price may need lender approval before it can be funded. Don't assume a change order is automatically covered.
  • Contingency handling. Ask whether your contingency is inside the loan or expected from your own funds. See contingency.

What you should ask your lender

  • How many draws, and on what schedule?
  • What are the fees per draw?
  • How long from request to funding?
  • Is there retainage, and when is it released?
  • How are change orders funded?

See construction-to-permanent loans and what happens at completion.