| Detail | Explanation |
|---|---|
| Typical frequency | Monthly, set by the loan agreement |
| Funds | Work in place and approved stored materials, net of retainage |
| Before funding | Inspection, pay application review, lien waivers, title update |
| Equity order | Often equity first, or pro rata with the loan, per the loan terms |
| Tracks against | The approved budget, line by line |
How does the construction draw process work?
The general contractor prepares a pay application showing progress by budget line. The borrower adds soft costs, such as architecture, permits, and interest, and submits the package to the lender. The lender's inspector visits the site to confirm the percent complete, the title company checks for new liens, and the lender funds the approved amount to the borrower, the contractor, or a disbursing agent.
Each step takes time. The project needs working capital to keep subcontractors paid while the draw is reviewed, so the draw calendar should be agreed with the contractor before closing.
What goes in a draw request package
- Pay application with a schedule of values, signed by the contractor and often certified by the architect
- Soft-cost invoices and proof of payment for costs funded with equity
- Conditional lien waivers for the current draw and unconditional waivers for the prior draw
- Updated budget showing original amount, approved changes, funded to date, current request, and remaining balance
- Change-order log and any requests to move money between budget lines
- Inspector's report and a title date-down endorsement
Worked example: equity first, then loan
In this hypothetical example, the $20,000,000 total project cost is funded with $7,000,000 of sponsor equity (35%) and a $13,000,000 loan (65% loan-to-cost). The hypothetical loan requires all equity to be spent before the first loan dollar funds.
Before draw 5, the project has spent $6,500,000 in total, all of it equity. Draw 5 asks for $1,200,000 of new costs. The remaining $500,000 of equity pays first, and the lender funds the other $700,000 of that request. Every draw after this one comes from the loan until the budget is exhausted.
| Line | Amount |
|---|---|
| Costs funded before draw 5 | $6,500,000 |
| Equity remaining before draw 5 | $500,000 |
| Draw 5 request | $1,200,000 |
| Paid from equity | $500,000 |
| Funded by the loan | $700,000 |
Why the draw schedule matters in underwriting
The projected draw schedule drives the interest reserve. Interest accrues only on drawn dollars, so a schedule that front-loads cost produces more interest than a schedule that spreads it evenly. Lenders test whether the reserve matches the curve.
The schedule is also the lender's early warning system. If a draw shows a budget line nearly spent while the inspector reports it half complete, the loan is out of balance. Most loan agreements then require the borrower to deposit the shortfall before the lender funds anything else. Retainage held on each pay application stays in the remaining balance and is released at completion.
Lenders fund stored materials and deposits cautiously. Items stored off site or custom equipment ordered early usually need insurance, a bill of sale, and lender approval before they count.
The construction underwriting guide covers draw controls in the context of completion and the takeout. For a project ready for construction financing, submit the deal with the budget and projected draw schedule.
Common questions
How long does a construction loan draw take to fund?
It depends on the lender, the inspector's schedule, and how complete the package is. The review includes a site inspection, document review, and a title update, so build that lag into the contractor's payment terms.
Do I have to spend my equity before the construction loan funds?
Many construction lenders require equity to go in first. Others allow pro rata funding with the loan or credit land and prior costs as equity. The loan terms set the order.
What happens if a construction loan goes out of balance?
The loan is out of balance when the undisbursed loan funds cannot cover the remaining cost to complete. The lender typically stops funding until the borrower deposits the difference or the lender approves another solution.
Can a construction draw include soft costs?
Yes, if the soft cost is in the approved budget. Architecture, engineering, permits, insurance, and interest are common soft-cost draw items, supported by invoices.
Who inspects the work before a draw is funded?
Usually a third-party construction consultant engaged by the lender. The inspector confirms percent complete by budget line and flags work that does not match the plans.
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