A construction draw is a portion of the loan funds that are disbursed at different stages of the construction process. Rather than receiving the entire loan amount upfront, the borrower gets money in phases, tied to the completion of specific work on the project.
How Does the Process Work?
Before construction begins, the borrower must have their loan approved by the lender. This includes submitting detailed plans, budgets, and timelines.
The lender and borrower agree on a draw schedule, which is a series of milestones or project stages that determine when funds will be disbursed. A well thought out draw schedule matched to the project plan can be a very good way to manage cash flow optimally.
Milestones and Inspections
Construction projects are divided into stages (e.g., foundation, framing, roofing, plumbing, electrical, and final inspection). Funds are released as each stage is completed. The borrower will usually need to submit a draw request to the lender, showing that the milestone has been reached.
A draw request for a specific stage of work can include:
- Proof of progress (invoices, contractor’s statements)
- Documentation of work completed, usually including an inspection report from a third-party inspector or appraiser.
The lender may require an inspection to verify the work completed before funds are released. This ensures that the contractor has done the agreed-upon work and that the project is on track. Inspections are usually scheduled after the completion of significant milestones.
Once the lender is satisfied with the progress, the requested funds are disbursed to the borrower or directly to the contractor to pay for the work done. The amount of each draw typically matches the percentage of work completed.
Repayment and Interest
During the construction phase, borrowers usually only pay interest on the amounts that have been disbursed, not the total loan amount. This can make it easier for borrowers to manage payments during the building process. After construction is finished, the loan typically converts into a traditional mortgage, and the borrower begins repaying both principal and interest.
Important Things to Remember
- Accurate budgeting: Borrowers should ensure that they have a clear and accurate budget for the project, as the funds released are based on this plan.
- Contingencies: Unexpected issues can arise during construction, so it’s wise to include contingency funds for potential delays or changes.
- Draw fees: Some lenders charge a fee for each draw request, and borrowers should clarify these details in advance.
- Final inspection: After the project is completed, a final inspection may be required before the last draw is made. This ensures that everything is in accordance with the original plans.
The construction draw process is a method of paying for a construction project in stages, ensuring that funds are only disbursed as the work is completed. A draw schedule approach not only ensures disciplined cash flow management but also helps reduce interest costs by limiting disbursements to only what’s needed at each phase. It’s a smarter, more strategic way to finance construction—delivering greater financial control and long-term savings throughout the build. Borrowers should stay in close communication with their lender, make sure inspections are completed, and keep track of expenses and milestones to ensure the process runs smoothly.
If you’re looking to fund a residential construction project, speak to us today. You can also watch our webinar for a detailed breakdown of the draw process.