How Construction Loan Draws and Draw Schedules Work

What is a Construction Loan Draw?

A construction loan draw is a disbursement of loan proceeds from the lender at a specific point during the build. Unlike a traditional mortgage where the full loan amount funds at closing, construction loans release capital in stages as work is put in place and verified by a third-party inspector.

This structure protects both sides. The lender confirms that construction is progressing on schedule and on budget before releasing additional funds. The borrower only pays interest on the amount actually drawn, which keeps carrying costs low in the early months when very little capital has been deployed.

How a Draw Schedule Works

At closing, the lender and borrower agree on a draw schedule tied to the approved construction budget. Each line of that budget (foundation, framing, roofing, MEP, drywall, finishes, permits, general conditions, contingency) lives on a document called the Schedule of Values (SOV). Every draw request is tied to specific SOV line items, and a licensed inspector verifies percent complete before funds release.

Most construction lenders use one of two draw structures:

• Milestone-based draws: Funds release when pre-defined construction milestones are verified complete. This is the most common structure for residential ground-up.
• Percentage-of-completion draws: Funds release based on the overall percent complete of the project, as determined by an inspector against the SOV.

Sample Draw Schedule: $500,000 Construction Budget

Here is a representative 6-draw schedule for a single-family ground-up build with a $500,000 hard-cost construction budget. Percentages move slightly by project, geography, and scope, but this illustrates how capital layers in over a 9-month schedule and how the drawn balance (and therefore the interest-only payment) grows.

Common Draw Milestones

Every project is different, but a typical single-family new construction loan has 4 to 6 draws aligned with these phases:

The Schedule of Values (SOV)

The SOV is the construction budget broken into trackable line items. It typically includes categories like site work, foundation, framing, roofing, siding, MEP rough and finish, drywall, cabinets, flooring, paint, fixtures, appliances, exterior finishes, permits, general conditions, and contingency. Every draw request references specific SOV lines and updates the budget-to-date totals.

Two rules worth understanding before you submit a draw:

• Work in place only. Draws fund against installed work, not materials sitting on site. A crate of windows in the driveway does not trigger the window line; the windows installed in their openings do.
• Permits must precede permitted work. Line items requiring permits (structural, electrical, plumbing, mechanical) do not fund until the corresponding permit has been provided to the lender. Soft-cost permit fees themselves are reimbursable only after the permit is pulled.

The Draw Request Process

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

1. Submit the draw request. The borrower or general contractor submits a signed draw request through the lender's asset management portal, including the draw amount, the SOV line items being drawn against, a certification that all work is complete, and the required supporting documents.
2. Provide documentation. Lenders require conditional and unconditional lien waivers from subcontractors and suppliers, an updated SOV showing costs incurred to date, photos of completed work, and copies of any permits tied to that phase. Clean documentation is the single biggest accelerator on funding speed.
3. Third-party inspection. The lender orders a licensed inspector (or appraiser in some markets) to verify work in place against the SOV. Inspections typically complete within 2 to 5 business days of order. Draws of $250,000 or more may also require a date-down title endorsement or an O&E report to confirm no intervening liens.
4. Approval and funding. Once the inspection confirms work is in place and documentation is clean, the lender reviews and funds the draw. Target turnaround from approval to wire is 2 to 3 business days. Inspection and wire fees are typically netted from the disbursement.

Interest-Only Payments During the Build

Construction loans are structured interest-only during the build. You only pay interest on funds that have actually been disbursed, not on the undrawn commitment. That means monthly payments start small and escalate as more capital is drawn.

Using the $500,000 sample above at an 11% construction rate: the month after the first draw, interest is roughly $688. By the time the project reaches interior finishes and $465,000 is outstanding, monthly interest is over $4,200. Total interest carried across a 9-month linear-draw build is around $20,600. Compare that to $41,250 if the full $500,000 were outstanding day one.

Two practical implications for builders:

• Model the escalating burn. Your month-9 interest payment can be 5-6x your month-1 payment. Cash plans that assume an even monthly carry will come up short.
• Fund an interest reserve. Most construction lenders (Ledger included) will size an interest reserve into the loan so builders do not have to write monthly checks during the build. The reserve draws automatically as interest accrues.

Holdbacks, Retainage, and Disbursement Types

"Holdback" is the portion of the approved draw amount that the lender withholds until final completion, usually 5-10% of each draw. It functions as protection against a subcontractor who completes rough work, gets paid, and walks off before finishing punch-out or final tie-ins. Holdback releases at final draw along with the Certificate of Occupancy.

How the lender actually sends the money depends on the disbursement structure, which is set at closing:

• 100% Lender Disbursement: All construction funds are wired by the lender directly against approved draws. Borrower is not pre-funding construction from their own pocket.
• Pro-Rata Disbursement: Borrower funds their equity contribution proportionally alongside each lender draw. Both parties share each phase on the agreed LTC ratio.
• Sequential (LIFO) Disbursement: Borrower spends all of their equity first (land plus cash-to-close), and the lender's draws begin only after the borrower's equity is fully deployed into the project.

Sequential is the most conservative structure for the lender and the least cash-friendly for the builder; 100% Lender is the most cash-friendly. Most Ledger construction loans use pro-rata, which balances both sides.

Budget Change Orders and Reallocations

Construction plans change. A change order is a formal amendment to the construction budget or scope, and material changes require written lender approval before the affected draw can fund. "Material" generally means any of the following:

• An increase to the total construction budget (overrun).
• A scope change that adds or removes a line item (for example, adding a detached garage).
• A significant reallocation between line items (commonly defined as any shift greater than 10% of a line, though thresholds vary by lender).
• Any change that affects the property's appraised value on completion.

For approved material changes, the borrower and general contractor sign an executed change order (sometimes called an OCO, or owner-directed change order) and submit it to the lender along with updated SOV and pricing documentation. Small line-item reallocations (for example, under-spending on landscaping to cover a modest overrun on cabinets) are often handled informally at the next draw. Communicate early. Surprises at inspection are the leading cause of draw delays.

Tips for Smooth Draws

• Stay ahead of lien waivers. Collect conditional and unconditional 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 with timestamped photos, ideally geo-tagged. This speeds up inspection and protects you if questions arise months later.
• Keep the SOV live. Update your Schedule of Values after every draw so costs-to-date, remaining budget, and percent complete reconcile on the first look.
• Flag change orders early. The second you know a line is going to run over, alert the lender. Retroactive change orders hold up inspections.
• Use the lender's portal. Most construction lenders (Ledger included) use a draw portal for submissions, inspections, and approvals. It creates a clear audit trail and is always faster than email.

Frequently Asked Questions

Related: LTC vs. LTV vs. LTARV — understand the leverage metrics lenders use to size your construction loan.

Related: First-Time Builder Construction Loans — no prior builds required when your GC has the experience.

Related: Construction Loan Calculator — estimate rate, monthly interest-only payment, and total cost of capital.