Construction Draw

A construction draw is a release of money from a construction loan to pay for work that has been done. Instead of funding the whole loan at closing, the lender pays it out in a series of draws as the project moves forward. Each draw is a type of loan disbursement. It raises the loan balance, and interest is then charged on the new, higher balance.

Lenders use two main draw plans. Under a fixed schedule, money goes out at set stages, such as foundation, framing and roof. Under a progress plan, the borrower asks to be paid for the share of each budget line that is actually complete. Progress plans are common on commercial projects.

Here is an example with round, hypothetical numbers. A builder asks for $100,000: $60,000 for framing and $40,000 for roofing. The inspector confirms framing is done, but roofing is only half complete on a $40,000 line. The lender approves $60,000 plus $20,000, or $80,000. After holding back 10 percent retainage, it funds $72,000.

Why it matters for lenders

Every draw is a new decision to lend more money. US bank regulators expect draws to match verified work and the budget to stay in balance, with enough undrawn funds left to finish the job. Paying on the borrower's request alone invites front-loading, where a builder bills for more work than is done in the early stages. If that builder later walks away, the lender is left with an unfinished project and too little money to complete it.

Draws also protect the lender's place on title. Before each release, lenders typically collect lien waivers showing that contractors and suppliers were paid from the prior draw, and order a title update to catch any new claims. In some states, a missed contractor's lien can end up ahead of the lender's mortgage.

How it works in practice

A typical draw runs like this:

1. The borrower submits a draw request by budget line, with invoices or the contractor's payment application.
2. The loan administrator checks each line against what is left in the budget.
3. An inspector visits and reports percent complete by line.
4. The administrator cuts any line the inspection doesn't support.
5. Lien waivers and a title update come in.
6. Retainage is held, a second person approves, and the funds go out.
7. The loan balance, remaining budget and interest all update.

Each step depends on the one before. When the budget, inspection reports and waivers sit in different files, draws slow down as the project grows. The final draw, which also releases retainage, is often the slowest of all.