Introduction
Short-term construction loans provide time-limited capital for new builds, renovations, and rehab projects. Unlike permanent mortgages, these loans disburse funds in stages (draws) that match project milestones. Lenders use inspections and paperwork to confirm work before releasing each draw—so planning the schedule and inspection logistics is as important as the budget itself.
How draw schedules work
- Lenders set a draw schedule in the loan agreement. Typical milestones include site work/foundation, framing, enclosure, and finish work. The contract will list the percent or dollar amount tied to each phase.
- Before each draw, lenders usually require documentation: contractor invoices, paid receipts, signed lien waivers, and an updated budget or draw request form. A third-party inspector or a lender’s construction officer will often verify progress.
- Interest handling: most short-term construction loans charge interest only on funds disbursed (not the full committed amount). Expect periodic interest payments until the loan is paid off or converted.
Inspection process and timing
- Types of inspections: lender inspections, municipal building inspections, and independent third-party inspections. Lender inspections focus on work quality and whether the milestone is complete to justify the draw.
- Scheduling tip: book municipal inspections and lender/site inspections back-to-back when possible. That reduces downtime between proof of completion and fund release.
- Common verification items: photos, contractor sign-offs, receipts, and lien waivers. Digital platforms (photo timelines, cloud folders) speed approval if your lender accepts them.
Practical checklist to reduce delays
- Build a realistic draw schedule tied to the construction timeline and permit approvals.
- Confirm inspection and funding turnaround times with your lender at closing.
- Keep organized records: invoices, contracts, change orders, proof of payments, and lien waivers.
- Use clear communication channels: weekly status updates between you, the general contractor, and the lender.
- Anticipate holdbacks: lenders sometimes retain a final holdback (5–10%) until final lien searches and a certificate of occupancy are complete.
Professional tips from practice
- In my practice, projects that map draws to contractor payment schedules and municipal inspection windows finish on time more often. Reserve a contingency (usually 5–10%) in your budget for change orders and inspection-related fixes.
- Negotiate reasonable inspection response times into your loan terms when possible—especially for tight timelines like retail remodels.
Common mistakes to avoid
- Underestimating inspection lead times: municipal and lender inspectors can have differing availability.
- Skipping lien waivers or poor documentation: this is the fastest way to stall a draw.
- Assuming flexible draws: lenders typically enforce milestone completion and documentation strictly.
When draw schedules can change
Adjustments are possible but usually require lender approval. Changes may stem from approved change orders, unforeseen site conditions, or schedule compression. Ask your lender how they handle revisions and what evidence they will accept for reallocated draws.
Related reading
- For an overview, see our guide on Construction Loans 101: Draws, Inspections and Interest Handling.
- If your project is a rehab, review How Lenders Structure Short-Term Construction Loans for Rehab Projects for lender-specific conditions and common rehab pitfalls.
Frequently asked questions
Q: What documentation is essential for each draw?
A: Contractor invoice(s), proof of payment for prior phase if required, signed lien waivers, photos, and the lender’s draw request form. A third-party inspection report is often required.
Q: How long between inspection and funds disbursement?
A: Timing varies—some lenders disburse within 48–72 hours after receiving a satisfactory inspection report and paperwork; others can take a week or more. Confirm timing at loan closing.
Q: Can I pay contractors while waiting for a draw?
A: Yes, but paying out-of-pocket risks using contingency funds. Maintain clear records and seek temporary advances from the lender if possible.
Authoritative sources and further reading
- Consumer Financial Protection Bureau: short-term and construction lending basics (consumerfinance.gov).
- Local building departments: check permit and inspection rules for your jurisdiction.
Professional disclaimer
This article is educational and not financial advice. Loan terms, inspection practices, and local rules vary—consult your lender, attorney, or financial advisor to evaluate the specifics of your project.
