Construction Draw Schedule Explained: Understanding the Construction Loan Draw Process

If you’ve never financed construction before, one of the most confusing aspects of construction loans is the draw schedule—how lenders release money in stages rather than all at once, why you only pay interest on drawn funds during construction, and what happens if your builder needs more money than the approved draw amount for a particular stage.

Understanding construction draw schedules is essential before signing builder contracts or finalizing construction financing. The draw process affects your builder’s cash flow, determines when you start making loan payments, and creates checkpoints where lender inspections verify your project is progressing as planned.

Here’s everything you need to know about construction loan draws—from how draw schedules work to what happens when construction costs or timelines don’t go as projected.

Why Construction Loans Use Draw Schedules

Unlike traditional mortgages where lenders advance the full loan amount at closing (paying the seller directly), construction loans release funds in stages as your home is built. This structure protects both lenders and borrowers:

Lenders avoid advancing hundreds of thousands of dollars before any work is complete—reducing risk if builders abandon projects, go out of business, or deliver substandard work that fails inspections.

Borrowers only pay interest on funds actually drawn and deployed in construction—keeping costs lower during the build when you may still be paying rent or an existing mortgage elsewhere.

Builders receive payments tied to completed work milestones—incentivizing them to stay on schedule and maintain quality standards to trigger the next draw release.

The draw schedule creates a rhythm for your construction project: builders complete work to reach a milestone, request a draw from the lender, the lender inspects to verify completion, funds are released, and construction continues to the next milestone.

Typical Construction Draw Schedule Structure

Most construction loans use 4-7 draw stages depending on loan amount, project complexity, and lender requirements. Here’s a typical 5-draw schedule for a $400,000 construction loan:

Draw 1 - Land and Foundation (20% - $80,000): Released after land is cleared, utilities are connected, foundation is poured and cured, and initial inspection passes. This draw covers land costs (if not already owned), site prep, excavation, foundation materials, and initial labor.

Draw 2 - Framing and Dried-In (30% - $120,000): Released after structural framing is complete, roof is installed, exterior sheathing is up, and windows/doors are in place—making the home weather-protected. This draw covers framing materials, roof materials, windows, doors, and framing labor.

Draw 3 - Mechanicals Rough-In (20% - $80,000): Released after electrical wiring, plumbing pipes, HVAC ductwork, and insulation are installed and inspected. This draw covers major system components, installation labor, and insulation materials.

Draw 4 - Interior Finishes (20% - $80,000): Released after drywall is hung and finished, flooring is installed, cabinets and countertops are in place, and fixtures are installed. This draw covers finish materials, interior labor, and visible elements that make a house feel like a home.

Draw 5 - Final Completion (10% - $40,000): Released after final inspections pass, punch list items are complete, landscaping is finished, and certificate of occupancy is issued. This draw covers final payments to subcontractors, landscaping, appliances, and builder final payment.

Some lenders front-load draws (larger percentages early when foundation and framing represent the most expensive work), while others back-load draws (holding more funds until later stages to maintain leverage if quality issues arise). Your construction mortgage broker through BrowseLenders.com can explain your specific lender’s draw structure before you commit to construction financing.

The Draw Request and Inspection Process

When your builder completes work to reach a draw milestone, here’s what happens:

Step 1 - Builder submits draw request to your lender, typically including photos of completed work, receipts for materials purchased, and invoices from subcontractors paid to date.

Step 2 - Lender schedules inspection within 3-5 business days—a third-party inspector visits your construction site to verify work is complete to the stage claimed and matches lender requirements.

Step 3 - Inspector submits report confirming work completion or identifying deficiencies that must be corrected before draw approval.

Step 4 - Lender approves draw and releases funds within 5-10 business days after inspection approval—money goes directly to your builder’s account (or to a title company if your construction contract includes escrow provisions).

Step 5 - Builder pays subcontractors and suppliers from draw proceeds and continues construction toward the next milestone.

This entire process takes 7-15 business days from draw request to funding—meaning your builder needs to plan ahead and request draws well before they’ll need those funds to pay upcoming subcontractors and material deliveries. Poor timing between draw requests and cash needs creates builder cash flow problems that can delay your project even when construction itself is progressing smoothly.

Interest-Only Payments During Construction

Unlike permanent mortgages where you pay principal + interest from day one, construction loans charge interest only on funds drawn to date—not the full loan amount. This keeps your costs manageable during construction when you may still have housing expenses elsewhere.

Using the $400,000 example above:

After Draw 1 ($80,000 drawn): You pay interest only on $80,000—approximately $400-500/month at 6% interest.

After Draw 2 ($200,000 drawn total): You pay interest only on $200,000—approximately $1,000-1,250/month.

After Draw 3 ($280,000 drawn total): You pay interest only on $280,000—approximately $1,400-1,750/month.

After Draw 4 ($360,000 drawn total): You pay interest only on $360,000—approximately $1,800-2,250/month.

After Draw 5 ($400,000 drawn total): You pay interest only on the full $400,000—approximately $2,000-2,500/month until construction completes and the loan converts to permanent financing with principal + interest payments.

Interest-only payments during construction are one of the key advantages of construction-to-permanent loans—keeping your carrying costs lower during the build when your budget is stretched across multiple fronts.

What Happens When Construction Costs Exceed Budget

Construction cost overruns are common—change orders, material price increases, unexpected site conditions, or underestimated labor costs can push your actual construction expenses above your approved loan amount. When this happens, you have limited options:

Option 1 - Pay overages out of pocket: The most common solution—cover cost overruns with cash reserves, personal savings, or contingency funds you budgeted for this exact scenario.

Option 2 - Negotiate with your builder: If overruns stem from builder errors, material waste, or inefficiency, negotiate with your builder to absorb some costs rather than passing everything through to you.

Option 3 - Reduce scope or finishes: If costs escalate beyond your budget, scale back finish selections, defer landscaping or upgrades, or make other compromises to bring the project back within your approved loan amount.

Option 4 - Request loan increase (rare and difficult): Some lenders will consider increasing construction loan amounts mid-project if your home will appraise higher than originally projected—but this requires new underwriting, new appraisals, and is not guaranteed even if you’re willing to increase your down payment.

This is why construction mortgage brokers emphasize building 10-15% contingency budgets into your construction loan—not for upgrades and extras, but for inevitable cost overruns that occur even on well-planned projects.

Timeline Delays and Draw Schedule Impacts

When construction timelines extend beyond projections, draw schedules create additional challenges:

Builder cash flow strain: Builders often front costs for materials and subcontractors before receiving draw payments—extended timelines between draws (due to weather delays, permit delays, or material delays) strain builder cash flow and can cascade into further delays if builders can’t pay subcontractors promptly.

Interest-only payment extension: The longer construction takes, the longer you make interest-only payments—potentially stretching your budget if you expected 6 months of interest-only but construction takes 12 months.

Rate lock expirations: If construction extends beyond your rate lock period, you’ll need expensive extensions or relocks at current market rates—potentially higher than your original lock.

To minimize timeline-related draw issues:

Request draws promptly when milestones are reached—don’t delay draw requests once work is complete, creating unnecessary cash flow problems for your builder.

Build timeline buffers into your construction schedule—assume construction will take 20-30% longer than your builder estimates to absorb typical delays.

Maintain open communication between you, your builder, and your lender about draw timing and construction progress—surprises create problems, while proactive communication enables solutions.

Understanding how your middle credit score affects your construction loan approval and interest rate is important—but managing your draw schedule effectively determines whether your project stays on track or derails due to cash flow problems unrelated to construction quality.

Draw Holdbacks and Retainage

Some construction lenders hold back a percentage of each draw (typically 10%) until final completion—ensuring the builder completes punch list items and obtains final certificate of occupancy before receiving full payment. This retainage protects you from builders who disappear after receiving most of their money, leaving minor (or major) items incomplete.

Your construction contract should specify:

Retainage percentage (typically 10% of each draw)

Release conditions (certificate of occupancy, final inspection approval, punch list completion)

Timeline for final payment (usually within 30 days of meeting release conditions)

Retainage provisions align builder incentives with project completion—they don’t get fully paid until you have a completed, inspected, occupancy-ready home.

Lien Waivers and Draw Documentation

Each time your builder receives a draw payment, they should provide lien waivers from all subcontractors and material suppliers who were paid from that draw—confirming they’ve been paid and won’t file liens against your property if the builder fails to pay them in the future.

Always require:

Conditional lien waivers before releasing each draw—confirming subcontractors will waive lien rights once they receive payment from that draw.

Unconditional lien waivers after each draw is paid—confirming subcontractors have been paid and are waiving all lien rights related to that stage of work.

Missing lien waivers create risk that unpaid subcontractors or suppliers could place liens on your property even after you’ve paid your builder through draw releases—requiring you to pay twice for the same work to clear the lien.

Working with Construction Mortgage Brokers on Draw Management

Construction mortgage brokers who specialize in builder financing help you understand draw schedules before construction starts, coordinate draw timing with your builder and lender, and troubleshoot draw-related issues that could delay your project or strain budgets.

Before finalizing construction financing, consult with construction mortgage brokers at BrowseLenders.com to understand your lender’s specific draw schedule, inspection requirements, funding timelines, and how to coordinate draws with your builder’s cash flow needs.

If you’re using cash-out refinance proceeds for your construction down payment, timing matters—your construction mortgage broker can structure both transactions to ensure down payment funds are available when you close on your construction loan without gaps that delay your construction start.

Construction draw schedules aren’t designed to be complicated—they’re risk management tools that protect lenders, borrowers, and builders by aligning funding with completed work milestones. Understanding how draws work before construction starts prevents surprises, keeps your project on schedule, and ensures everyone gets paid appropriately as your dream home progresses from foundation to final certificate of occupancy.