How Construction Loan Draw Schedules Work (And Why They Matter More Than Your Rate)

Most investors who are new to ground-up construction spend their energy negotiating the interest rate. That is the wrong fight. The draw schedule is what determines whether your project stays funded, on time, and on budget.

What a Draw Schedule Actually Is

A construction loan does not work like a standard mortgage where you receive the full loan amount at closing. Instead, the lender releases funds in stages called draws, tied to verified milestones in the construction process.

A typical draw schedule might look like this:

• Draw 1 (foundation complete): 10 to 15% of the loan amount released
• Draw 2 (framing complete): 20 to 25% released
• Draw 3 (mechanicals rough-in complete: plumbing, electrical, HVAC): 15 to 20% released
• Draw 4 (drywall and interior work complete): 15 to 20% released
• Draw 5 (substantial completion/certificate of occupancy): remaining balance released

The percentages vary by lender, project type, and loan structure. The sequence is negotiable to a degree. But the core mechanic is the same: you do not get the money until the work is complete and verified.

Why This Creates Budget Problems

The timing gap is where most investors get into trouble. You pay your contractor to complete a phase of work, then you request the draw, then the lender verifies the work, then the funds are released. That process takes time, often 7 to 14 business days, sometimes longer.

That means you are frequently carrying the cost of completed work out of pocket while waiting for reimbursement. If your cash reserves are thin, or if your contractor requires payment before moving to the next phase, that gap becomes a real problem.

The other common issue is draw disputes. Lenders often hold back 10% of each draw as a retainage until the project reaches substantial completion. If your draw schedule did not account for this, your actual available capital at each stage is lower than you planned.

Dutch vs Non-Dutch Interest

When obtaining a construction loan, you will have two mechanics to choose from for the interest payment: dutch or non-dutch interest. Dutch loans charge interest on the full loan amount, whether you have drawn the balance or not. Non-dutch loans, on the other hand, only charge interest on the portion of the loan that has been drawn. Here’s an example: if you have an $800,000 construction loan and you have only drawn $300,000 so far, you would be paying interest on the full $800,000 for a dutch loan, and would only be paying interest on $300,000 for a non-dutch loan. This is something worth considering, as going the non-dutch interest route can save you substantial money on interest paid.

How to Read a Draw Schedule Before You Sign

Before committing to a construction loan, ask for the full draw schedule and work through it against your actual project plan. The questions worth asking:

• How long does the lender typically take to release funds after a draw request?
• Is there a retainage holdback, and at what percentage?
• What triggers each draw – a completed inspection, a signed contractor certification, or both?
• Are draws reimbursement-based (you pay first, then get funded) or advance-based (funds released before the work begins)?
• What happens if an inspection fails or a draw gets disputed?

Reimbursement-based draws are more common and require more working capital. Advance-based draws are rarer but materially easier on cash flow. Knowing which structure you are working with before you build your budget is not optional.

The Real Number to Model

The rate matters. A 200 basis point difference on a 12-month construction loan is real money. But a draw schedule that requires you to carry 30 days of contractor costs out of pocket, across five phases, on a project where you have tight reserves, will do far more damage than a higher coupon.

Model both. Know your maximum cash exposure at each phase. Make sure your reserves can cover the gap between work completion and draw funding without straining the project.

A construction loan is not just a line of credit. It is a structured disbursement agreement. The investors who treat it that way finish their projects. The ones who focus only on the rate sometimes do not.