Unlike a bridge or DSCR loan that wires full proceeds at closing, a construction loan funds in installments — draws — released as the work is completed. The draw schedule is one of the most negotiated parts of any construction loan because it directly impacts the developer's working capital and the lender's risk exposure.
Why construction loans use draws
From the lender's perspective, a half-built building is worth less than the materials and labor sunk into it. If the lender funded the entire loan at closing and the sponsor walked, the lender would own a partially-built asset that's hard to liquidate. So funds are released only as physical value is created on the site.
From the borrower's perspective, drawing in stages means interest only accrues on the drawn balance — you don't pay interest on unfunded loan amount. That makes the effective cost much lower than the headline rate would suggest, especially in the early months of a project when most of the loan is still undrawn.
A typical draw schedule on a multifamily new build
- Draw 1: Land payoff and soft costs (architectural, permits, impact fees) — released at closing or first inspection
- Draw 2: Foundation complete (footings, slabs, underground utilities)
- Draw 3: Framing complete and dried-in (walls, roof structure, exterior sheathing)
- Draw 4: Mechanical, electrical, plumbing rough-in complete
- Draw 5: Drywall and exterior finish complete
- Draw 6: Interior finishes (flooring, cabinets, paint, fixtures) and exterior finishes complete
- Draw 7: Final inspections, certificate of occupancy, punch list
- Holdback (often 5–10%) released at certificate of occupancy and lien-waiver receipt
How a draw actually gets funded
The general contractor submits a draw request with line-item invoices, lien waivers from subcontractors, and a percentage-complete affidavit. The lender's construction consultant (typically a third-party inspector) visits the site, photographs the work, and certifies the percentage complete matches the draw request.
Once approved, the lender releases funds to the borrower within 5 to 10 business days. The borrower pays the GC, the GC pays the subs, the cycle repeats for the next milestone.
Interest reserve
Construction loans almost always include an interest reserve — a portion of the loan amount held back at closing specifically to fund interest payments during the build. The reserve is sized based on the expected drawn balance over the loan term, the rate, and the build schedule.
On a $10M, 18-month construction loan at 10%, the interest reserve might be $700K–$900K depending on the assumed draw pace. The reserve funds interest payments automatically without requiring the borrower to write checks each month from operating cash, which is critical because the property doesn't yet produce income.
What blows up a draw schedule
- Contractor lien filed by an unpaid subcontractor — draws frozen until cured
- Cost overruns the budget can't absorb — requires sponsor equity injection or change order from lender
- Schedule slippage past loan maturity — extension required, often at a fee plus rate bump
- Quality issues found at inspection — work must be redone before draw releases
- Material price spikes (lumber, steel, copper) — soft cost contingency consumed earlier than planned