How Construction Loan Draws Work on a House Build

A construction loan doesn't land in your account the way a mortgage does. It gets released in pieces, usually five of them, as the work reaches milestones your lender sends someone out to verify, and you pay interest only on the money that has actually been drawn rather than on the full loan for the full build. So a construction loan draw schedule is two things at once: a payment calendar that decides when the contractor gets funded, and an interest calculation that decides what the money costs you, and the second one is the part that gets left out of most budgets we see.

What a construction loan draw schedule looks like

Lenders write these differently, but the structure for residential new construction is fairly consistent, and the one our cost model carries as its default is five draws tied to milestones rather than to dates:

• Draw 1, design and permitting: 15 percent of the loan, at closing
• Draw 2, sitework and foundation: 20 percent, about a fifth of the way into the schedule
• Draw 3, framing and shell complete: 25 percent, about 40 percent of the way in
• Draw 4, rough-ins complete: 20 percent, about 65 percent of the way in
• Draw 5, finishes and close-out: 20 percent, about 85 percent of the way in

The milestones are the thing to read there, not the percentages. Money moves when work is verifiably in place, which means an inspector or an appraiser goes out, looks at the job, and certifies a percentage of completion, and the lender funds against that certification rather than against the contractor's invoice or anybody's opinion that framing is basically done. If your builder expects to be paid on a schedule and your bank expects to pay on inspections, somebody has to reconcile those two calendars, and on most projects that somebody ends up being the owner, usually at the worst possible moment.

Why the draw schedule is the reason your interest number is lower than you think

Because each draw funds later than the last, each one accrues interest for a shorter period, and the total lands well under what a flat calculation on the full loan would give you. Run it on a real set of assumptions and the gap is large. Take a $500,000 construction loan over a twelve-month build at 11.22 percent, which is the effective rate our model uses as its market default alongside an 84.29 percent loan-to-cost, both drawn from the Q1 2026 residential-construction market rather than from a rounder, friendlier number:

• Draw 1, $75,000 at closing, outstanding twelve months: about $8,415
• Draw 2, $100,000 around month two, outstanding ten months: about $9,350
• Draw 3, $125,000 around month five, outstanding seven months: about $8,181
• Draw 4, $100,000 around month eight, outstanding four months: about $3,740
• Draw 5, $100,000 around month ten, outstanding two months: about $1,870

That comes to roughly $31,600 in construction-period interest. The same loan calculated flat, as if the whole $500,000 sat outstanding all twelve months, comes to $56,100, so the draw structure is worth something like $24,500 on a single house. Plenty of owner budgets carry the flat number and then treat the difference as a cushion that was never really there, and plenty of others carry no interest line at all, which is the more expensive mistake of the two.

Draw 1 is design and permitting, which is also where the schedule slips

The first draw funds the least visible part of the project and the part most likely to run long, because permitting requirements are set town by town rather than at the state level. In the fifteen New York counties where we've read the codes, covering 367 municipalities and 3,427 zoning districts, only six municipalities have adopted the stretch energy code, and four of those six are in Ulster County: Woodstock, Kingston, Marbletown and the Town of Rochester. If your parcel sits in one of them the drawings have to prove more before anyone issues a permit, and if it sits in the town next door they don't, which is a difference that shows up as weeks on a schedule long before it shows up as dollars in a budget. The Ulster County zoning data is a reasonable place to see how far apart neighboring towns get on this, and we wrote up the broader question of what triggers a building permit separately.

The reason it matters to the loan is that every month of delay is a month of interest on money already drawn. On that same $500,000 at 11.22 percent, stretching a twelve-month build to fifteen adds roughly $7,250, which is real money spent on nothing but calendar. Time is one of the more expensive inputs in a build and it rarely gets priced like one, which is why we run the zoning read, the permitting path and the draw schedule on the same model rather than on three different spreadsheets that stop agreeing with each other by month four.

The gap between "we're done with framing" and what the bank will certify

This is the practical thing to manage, and it comes up on nearly every build. Your contractor finishes the shell, asks for the framing draw, and the bank's inspector goes out and certifies something less than 100 percent because the sheathing is on but the roof isn't dried in, or the window openings aren't flashed, and the draw funds short. The contractor has already paid their framing crew. Somebody is short for two or three weeks.

A few things keep that from becoming a crisis. Get the lender's actual milestone definitions in writing before closing and give them to the contractor, because the two of you agreeing on what "shell complete" means is worth more than the payment schedule in the contract. Ask what retainage the lender holds and whether the contract mirrors it, since a builder holding back ten percent from their subs while the bank holds back ten percent from them is a workable arrangement and a mismatch is not. Find out how long the lender takes between inspection and funding, because five business days and twenty business days are different businesses. And keep the sitework draw honest, since that's the line most likely to go over on raw land, and we've written up what it costs to make a Hudson Valley parcel buildable if you want the itemized version.

None of it is complicated. It's mostly a matter of somebody holding the lender's calendar, the contractor's calendar and the town's calendar in one place and noticing when they stop lining up, which is most of what we do as a design and owner's representation studio, and it's the same set of numbers Aldo runs when we're pricing a project before anyone commits to it.

The figures here come from our own cost model and zoning dataset and are decision-support, not lending or engineering advice. Loan terms, draw structures and retainage vary by lender, and permitting requirements vary by municipality, so verify both with your lender and your building department before you budget against them.