How Construction Loan Draws Work

What is a Construction Loan Draw?

A construction loan draw is a disbursement of funds from the lender to the borrower (or directly to the title company) at specific points during the construction process. Unlike a traditional mortgage where the full loan amount funds at closing, construction loans release capital in stages as work is completed and verified.

This structure protects both the lender and the borrower. The lender confirms that construction is progressing on schedule and on budget before releasing additional funds. The borrower only pays interest on the amount that has actually been drawn, keeping carrying costs lower during the build.

How the Draw Schedule Works

At loan closing, the lender and borrower agree on a draw schedule tied to the approved construction budget. Each draw corresponds to a specific phase or milestone of the build. The budget is broken into line items (foundation, framing, roofing, plumbing, electrical, finishes, etc.), and draws are requested as those phases are completed.

Most construction lenders use one of two draw structures:

• Milestone-based draws: Funds are released when pre-defined construction milestones are verified complete. This is the most common structure for residential construction loans.
• Percentage-of-completion draws: Funds are released based on the overall percentage of the project that has been completed, as determined by an inspector.

Common Draw Milestones

While every project is different, a typical single-family new construction loan will have 4 to 6 draws aligned with these major phases:

The Draw Request Process

When a milestone is complete and you are ready to request funds, the process typically follows these steps:

1. Submit the draw request. The borrower (or their general contractor) submits a draw request through the lender's asset management portal. This includes the draw amount, the line items being drawn against, and supporting documentation.
2. Provide documentation. Most lenders require photos of completed work, lien waivers from subcontractors and suppliers, and an updated budget showing costs incurred to date. Clean documentation speeds up the process significantly.
3. Third-party inspection. The lender orders an inspection (typically performed by a licensed inspector or appraiser) to verify that the work described in the draw request has been completed. Inspections are usually completed within 2 to 5 business days.
4. Approval and funding. Once the inspection confirms the work is complete and the documentation is in order, the lender approves the draw and wires the funds. At Ledger, draws fund within 48 hours of approval.

Interest on Drawn Balances

One of the key advantages of a construction loan's draw structure is that you only pay interest on the amount that has been disbursed, not the full loan commitment. If your total loan is $500,000 and you have drawn $200,000, you are paying interest on $200,000.

This is why construction loans are structured as interest-only during the build period. Monthly payments start low and increase as more capital is drawn. Builders should factor this escalating carrying cost into their project pro forma.

Holdback Explained

Most construction lenders retain a holdback (also called retainage) on each draw. This means the lender funds slightly less than 100% of each draw request, holding back a small percentage (typically 5-10%) until the project is fully complete.

The holdback serves as a buffer to ensure there are sufficient funds to complete the project and address any punch list items. The retained amount is released with the final draw after the Certificate of Occupancy is issued and all conditions are satisfied.

Tips for Smooth Draws

• Stay ahead of documentation. Collect lien waivers from every subcontractor and supplier as work is completed, not after the fact. Missing waivers are the number one cause of draw delays.
• Take progress photos. Document each phase of construction with timestamped photos. This makes the inspection process faster and provides a clear record if questions arise.
• Stick to the approved budget. Change orders happen, but significant deviations from the approved budget may require lender approval before draws can continue. Communicate changes early.
• Submit on schedule. Build your draw requests into your project timeline. Do not wait until you need the funds urgently. Submit as soon as each milestone is verifiably complete.
• Use the lender's portal. Most lenders (including Ledger) provide an online portal for draw submissions, tracking, and communication. Using the portal keeps everything organized and creates a clear audit trail.