How Construction Loan Draws Work (and What You'll Pay While Your Home Is Being Built)

A construction loan doesn't hand you a check at closing. The money is released in stages, called draws, as the builder finishes each phase of work. Each draw is usually verified by an inspection, and during the build borrowers typically pay interest only on the money that has been drawn so far, not on the full loan amount. When the house is finished, the loan converts to (or is refinanced into) a regular long-term mortgage.

That's the short version. The rest of this guide explains how each piece works, what to expect from your payments during the build, and where projects tend to go sideways.

Why construction lenders release money in stages

When you buy an existing house, the lender's collateral already exists on day one. With new construction, the collateral is a vacant lot and a set of plans. The lender protects itself (and you) by paying for the house only as the house is actually built. If the builder walks off the job after framing, nobody has prepaid for drywall and cabinets that were never installed.

Before closing, the lender typically reviews the builder's contract, the construction budget, and the plans, then sets up a draw schedule tied to those documents. You'll want to read that schedule as carefully as the loan terms, because it controls your cash flow for the length of the build.

The draw process, step by step

The builder completes a phase. Common milestones are site work and foundation, framing, roof and windows ("dried in"), mechanical rough-ins, drywall and interior finishes, and final completion.
A draw request is submitted. Usually by the builder, sometimes signed off by you. It lists the work completed and the amount requested against the budget.
An inspector verifies the work. The lender (or a third-party inspector) confirms the work billed has actually been done and matches the plans. Partially finished work generally isn't paid for.
Funds are released. Money goes to the builder (sometimes jointly to you and the builder, or directly to subcontractors). Your loan balance increases by the draw amount.
Your next payment goes up. Because interest is charged on the outstanding balance, each draw raises the following month's interest payment.

What your payments look like during the build

Because you pay interest only on what has been drawn, your payments follow the construction schedule. Early in the build, when only the site work and foundation have been paid for, the balance is small and so is the interest. Each later draw (framing, roof and rough-ins, drywall and finishes) raises the balance, and the payment climbs with it. The highest interest payments come at the end, when nearly the full loan has been drawn.

Paying interest only on the drawn balance generally costs less than paying interest on the full loan from the start, but notice the shape: payments start small and climb toward the end. If you're still paying rent or a mortgage on your current home during the build, that final stretch is where budgets get tight.

Once the loan converts to a permanent mortgage, your payment becomes a regular principal-and-interest payment on the full balance, plus property taxes and insurance. Real numbers will depend on your rate, term, fees, and how the draws are structured.

Planning tip: ask your loan officer for a projected interest schedule based on your builder's actual draw plan. Then add a buffer for delays. Every month the build runs long is another month of interest at the highest balance.

One closing or two? How the loan becomes a mortgage

There are two main structures:

Single-closing (construction-to-permanent)

You sign once. The construction phase and the permanent mortgage are set up in the same transaction, and the loan converts when the house is complete. Fannie Mae describes this structure as closing the construction loan and permanent financing at the same time with one set of documents, which saves borrowers a second closing appointment (Fannie Mae, Construction-to-Permanent Financing). Its Selling Guide also sets limits on how long the construction period can run for loans it will later purchase (Selling Guide B5-3.1-02), which is one reason lenders care so much about your builder's timeline.

Two-closing

You take a short-term construction loan, then close on a separate mortgage that pays it off once the house is finished. This can offer flexibility, but it usually means two sets of closing costs and requalifying for the second loan.

What lenders typically want to see

A signed builder contract and detailed budget, including allowances for finishes.
Plans and specifications the appraiser can use to value the finished home.
Equity in the deal. Lenders limit how much of the project they'll finance, and your share can come from cash or, often, equity in a lot you already own. Union Savings Bank offers construction loans with interest-only payments during the build and a simplified draw-request process; a loan officer can explain the current financing limits.
Normal mortgage qualification: income, credit, and debt-to-income ratio, calculated on the permanent loan payment.

Where construction loans go wrong

Change orders without a funding plan. Upgrading countertops mid-build changes the budget. Unless the loan was sized with a contingency, you'll usually pay the difference in cash.
Draws requested ahead of the work. Inspectors flag incomplete phases, which delays payment to the builder and can stall the job.
Ignoring the overlap period. Many people carry their current housing cost plus rising construction interest for months. If you own your current home, Union Savings Bank's Blanket Construction Loan lets you build a new home while living in your current one, with one payment.
Unclear lien waivers. Make sure subcontractors and suppliers are paid from each draw so no one can file a mechanic's lien against your property.

Frequently asked questions

Who requests the draws, the borrower or the builder?

Usually the builder, but many lenders require the borrower to approve each request. Ask how it's handled before closing.

Can you act as your own general contractor?

Ask your loan officer whether an owner-builder plan works for your project. Expect more documentation and closer review if it does.

What if you don't own land yet?

You'll need to finance or buy the lot first, or line the land purchase up with the construction loan. Union Savings Bank's lot loans for building sites can be combined with a construction loan later. Before buying, confirm zoning, septic or sewer, utilities, and flood status for the parcel.

Next step

Before you commit to a builder, get the draw schedule, the interest projection, and the conversion terms in writing. If you're building in Ohio, Indiana, Kentucky, or Pennsylvania, Union Savings Bank offers home loans, including construction financing, with experienced mortgage loan officers who give personal guidance throughout the lending process.