MoneyLifeCalcA construction loan doesn't hand over the full amount on day one. Instead, the lender pays the builder in stages, called draws, as work is completed and checked. Understanding how draws work helps you plan your cash, your monthly payments during construction, and your conversation with the lender and builder.
What a draw schedule is
A draw schedule divides the total construction cost into stages tied to visible progress. A typical schedule might release money at these points, though every lender and contract is different:
- Foundation complete
- Framing complete
- Roof, windows, and rough-in plumbing, electrical, and mechanical
- Insulation and drywall
- Finishes and fixtures
- Final inspection and certificate of occupancy
Each stage releases a percentage of the total cost, and the percentages should add up to 100%. The schedule is usually part of the construction contract, so review it before you sign.
How a draw gets paid
When a stage is finished, the builder requests the draw. The lender typically sends an inspector to confirm the work is done before releasing funds. Many lenders also require lien waivers, which are signed statements from the builder and suppliers confirming they've been paid for work so far. Lien waivers protect you from a subcontractor later claiming money against your property.
Your cash usually goes first
Construction loans often cover a percentage of the cost, not all of it. Lenders commonly require your own money, the part the loan doesn't cover, to be spent before loan funds are used. For example, with a $500,000 build and a loan covering 80%, your first $100,000 pays for the early stages, and the loan takes over after that.
Why your payments grow during the build
During construction, most loans charge interest only on the amount drawn so far. Early in the build, when little has been drawn, the payment is small. As framing, systems, and finishes are paid for, the balance and the monthly interest grow. The largest interest payments usually come near the end, just before the loan converts or is paid off.
That's why a draw schedule is worth modeling ahead of time. Our Construction loan draw schedule calculator spreads your stages across the build, spends your cash first, and shows the loan balance and interest-only payment after each draw, plus the estimated total interest during construction.
When construction is finished
After the final inspection and certificate of occupancy, the construction loan is usually converted into a regular mortgage (a "construction-to-permanent" or one-time close loan) or paid off by a new mortgage (a two-time close). Ask your lender which type you have, because it affects closing costs and whether your rate is locked in advance.
Questions to ask before you sign
- How many draws are there, and what percentage does each release?
- Who orders inspections, how long do they take, and is there a fee per draw?
- Do you hold back a percentage of each draw (called retainage) until the end?
- Is my own money required to be spent first?
- Is the loan one closing or two, and when is the rate set?
Delays happen in construction, and a delayed inspection can delay a draw and the builder's payment. A realistic schedule, a contingency in your budget, and clear answers to these questions go a long way. For the overall budget, start with the New construction cost calculator, and compare bids with Cost per square foot.