Construction Loans and Draw Schedules: How Disbursements Work

Introduction

Construction loans and draw schedules control cash flow during a build. Instead of releasing the full loan at closing, lenders advance funds in stages — commonly called draws — as predetermined work is completed and verified. This protects lenders from paying for unfinished work and helps borrowers avoid carrying interest on money they haven’t used.

Why staged disbursements exist

Lenders use draw schedules because construction involves uncertain timing, varying costs, and the need for quality verification. Draws reduce fraud and overpayment risk and align funds with actual progress. For borrowers, scheduled draws can ease budgeting and reduce interest costs because interest accrues only on the amount disbursed, not the full loan commitment.

A step-by-step view of how draws are paid

1. Loan approval and draw schedule agree­ment

• At loan origination the lender, borrower, and often the builder agree on a draw schedule and a construction budget (also called a construction cost breakdown). This schedule lists stages (foundation, framing, roof/exterior, mechanicals, finish) and percentages or amounts tied to each stage.
• The loan contract will specify required documentation for each draw: invoices, lien waivers, builder’s certifications, and inspection reports.

1. Initial draw and mobilization

• The first draw typically funds site preparation and foundation work. An initial draw authorization must be signed and funds may be sent to an escrow or directly to the builder depending on lender policy. See the FinHelp article on Initial Draw Authorization for process details: “Initial Draw Authorization (Construction Loans)” (https://finhelp.io/glossary/initial-draw-authorization-construction-loans/).

1. Inspections and documentation

• Before each subsequent draw, the lender (or an independent inspector) verifies that the agreed work is complete. This often requires:
• Paid invoices and contractor certifications
• Conditional or unconditional lien waivers
• Photographs or site inspections
• Draw request forms signed by borrower and builder
• Lenders use these documents to validate payment requests and to protect against lien exposure.

1. Disbursement and retainage

• After verification, the lender wires or issues a check for the approved draw amount. Many lenders hold retainage — commonly 5%–10% of each draw — until final completion to ensure punch-list items are finished.

1. Ongoing monitoring and reporting

• Lenders monitor job progress throughout the project. If the project stalls, lenders may freeze draws until issues are resolved. For more on ongoing oversight, see “Construction Loan Monitoring” (https://finhelp.io/glossary/construction-loan-monitoring/).

Typical draw schedule example

This example is illustrative — actual percentages vary by lender, project scope, and local norms.

How interest and payments work during construction

• Interest accrues only on the disbursed (drawn) balance — not the full loan amount. Most construction loans require monthly interest-only payments during the building phase.
• Some lenders require an interest reserve (a portion of the loan set aside to pay interest during construction). Expect that to be built into the loan budget or funded at closing.
• At project completion, loans either convert to a permanent mortgage (construction-to-permanent or one-time close) or require payoff with a separate mortgage. Compare conversion options in our “Construction-to-Permanent Mortgages” guide: (https://finhelp.io/glossary/construction-to-permanent-mortgages-process-and-draw-schedules/).

Common documents lenders request before draws

• Signed draw request form from borrower and builder
• Contractor invoices and receipts
• Lien waivers (conditional or unconditional based on policy)
• Progress or conditional inspection report
• Updated schedule of values or revised budget

Roles and responsibilities: borrower, builder, lender, inspector

• Borrower: Provide timely draw requests, review invoices, approve work, and manage payments to contractors.
• Builder / general contractor: Complete the work per contract, submit draw requests, and provide lien waivers and affidavits.
• Lender: Verify work via inspection, process draws, and maintain lien protection measures.
• Inspector: Provide an independent confirmation that the specified work is complete.

Real-world issues that delay draws

• Missing or unsigned lien waivers
• Incomplete or framed work that fails inspection
• Budget overruns with no approved change orders
• Slow contractor billing or missing invoices
• Weather or permit delays

In my experience, the most common delay is incomplete documentation. Builders who submit clear, itemized invoices, photo evidence, and signed lien waivers generally speed fund releases by weeks compared with those who do not.

Fees and costs to expect

Construction loans carry costs beyond interest:

• Origination fees and underwriting charges
• Inspection fees — charged per draw or monthly
• Escrow or disbursement administration fees
• Interest reserve or carrying costs
• Appraisal and title expenses

Typical eligibility and underwriting considerations

Lenders underwrite construction loans differently from permanent mortgages. Key factors include:

• Borrower credit score and financial reserves — many lenders look for a score above 620 and reserves to cover cost overruns.
• Down payment / borrower equity — often 20%–25% of total project cost is required.
• Detailed builder contract, construction timeline, and schedule of values.
• Builder qualifications — lenders prefer licensed general contractors with bonding and verifiable references.
• Loan-to-cost (LTC) and loan-to-value (LTV) ratios are evaluated; lenders often use LTC to control construction risk.

Common mistakes and how to avoid them

• Mistake: Assuming draws are automatic. Fix: Prepare documents in advance and maintain communication with your lender.
• Mistake: Underestimating soft costs (permits, inspections, utility hookups). Fix: Include a 10%–15% contingency in your budget.
• Mistake: Using an unqualified builder to save on bids. Fix: Vet contractors, check references, and verify insurance and licenses.

Practical tips from practice

• Build a 10%–15% contingency: Even small projects run into unexpected expenses.
• Schedule draw requests monthly: Regular, predictable requests help the lender plan inspections and releases.
• Keep a paper trail: Signed change orders, invoices, lien waivers, and inspection reports shorten approval time.
• Consider retainage negotiations: If your builder has a strong track record, you might negotiate lower retainage with appropriate safeguards.

Frequently asked questions (short answers)

• Can I change the draw schedule once construction starts?
  Possible, but it requires lender approval and usually updated documentation.

• What happens if the builder files a lien?
  A lien can block future draws and complicate financing; lien waivers and timely payments are your main protections.

• Does the borrower ever receive money directly?
  Sometimes the borrower gets draws directly; more often funds go to the builder or an escrow account per the loan agreement.

• Are construction loans riskier than regular mortgages?
  Yes — higher risk of delays and cost overruns. That’s why interest rates, fees, and documentation requirements are higher.

Interlinking resources

For more granular process details see FinHelp’s resources on initial draw steps and loan conversion:

• Initial draw authorization procedures: “Initial Draw Authorization (Construction Loans)” (https://finhelp.io/glossary/initial-draw-authorization-construction-loans/)
• Converting to a permanent mortgage and draw schedule specifics: “Construction-to-Permanent Mortgages: Process and Draw Schedules” (https://finhelp.io/glossary/construction-to-permanent-mortgages-process-and-draw-schedules/)
• Ongoing oversight and lender monitoring during construction: “Construction Loan Monitoring” (https://finhelp.io/glossary/construction-loan-monitoring/)

Authoritative resources

• Consumer Financial Protection Bureau: general guidance on construction lending and consumer protections (https://www.consumerfinance.gov/).
• U.S. Department of Housing and Urban Development: information on FHA construction programs and one-time close options (https://www.hud.gov/).

Final checklist before you request a draw

• Are invoices itemized and dated? Yes/No
• Is the corresponding work photographed or inspected? Yes/No
• Are lien waivers signed and collected? Yes/No
• Is the builder’s draw request form complete and signed? Yes/No
• Do you have funds reserved for the next stage or change orders? Yes/No

Professional disclaimer

This article is educational and based on industry practices and over a decade of lending experience. It does not replace personalized legal, tax, or mortgage advice. Consult a licensed mortgage professional or construction attorney for guidance tailored to your project.