Construction Loan Draw Schedule: Homebuilder Guide 2026

A construction loan draw scheduleDraw Schedule — the month-by-month plan setting when a lender advances funds against verified construction progress and how much each advance is. is the month-by-month plan that shows when a lender advances funds against verified work-in-place, when the borrower draws equity, and when revenue from home sales repays the debt. For a single-home spec build, the draw schedule is a formality. For a homebuilder running 6, 12, or 24 starts per quarter, the draw schedule is the financial model that determines whether the business runs out of cash before the sales close. Getting it wrong does not show up as an obvious error. It shows up as a line of credit that is unexpectedly maxed out two months before your busiest closing month.

This article walks through the mechanics that lenders actually check — the average-balance interest math, the peak-utilization sizing of a revolver, and the AIA G702/G703AIA G702 / G703 — the American Institute of Architects' standard payment-application forms. G702 is the one-page summary; G703 is the line-item Schedule of Values backup. draw-package format — and grounds them in the regulatory guidance bank examiners apply when they review your file.

How construction loan draws actually work#

Construction loans are not funded at closing. They are advanced in stages, against verified work-in-place. The OCC's Comptroller's Handbook for Commercial Real Estate Lending describes the mechanic precisely: progress payments are released against architect- or inspector-certified percentages of completion, with the lender controlling the disbursement pace.^{1OCC, Commercial Real Estate Lending — Comptroller's Handbook, “Construction Lending Policies, Procedures, and Internal Controls.” View source} A typical residential construction loan has 5 to 7 draw stages keyed to construction milestones: foundation, framing, mechanical/electrical/plumbing rough-in, drywall, finish work, and final completion.^{2Construction Draw Process — “Residential construction loans work differently — 5 to 7 total draws tied to defined milestones like foundation, framing, rough-in, drywall, trim, and final.” Commercial projects typically run 12-24+ monthly draws against a percentage-of-completion schedule.} The lender inspects the work before each draw, certifies the percentage of completion, and advances the corresponding portion of the loan.

The borrower contributes equity first, before the loan starts drawing. This is the “equity in firstEquity in First — lender requirement that the borrower fund their full equity contribution before the construction loan begins to draw. Standard on construction loans and rarely negotiable.” rule and it is rarely negotiable. On a $285K home with a $200K construction loan (70 percent LTCLoan to Cost (LTC) — construction loan amount divided by total project cost. The Federal Reserve's interagency supervisory LTV limit for 1–4 family residential construction is 85%.), the builder funds the first $85K from equity (foundation through early framing), then draws the loan for the remaining $200K across 4 to 5 inspections over 6 to 9 months. Federal Reserve interagency guidelines cap the LTV for a 1–4 family residential construction loan at 85%, which is the upper bound the lender's policy must reflect.^{3Federal Reserve, Interagency Guidelines on Real Estate Lending Policies: 1–4 family residential construction LTV ceiling 85%; raw land 65%; land development 75%. View source}

The interest math lenders actually check#

The interest reserveInterest Reserve — a budget line within the construction loan that funds interest payments during the build. The OCC requires reserves to cover interest through completion and lease-up or sale. on a construction loan accrues on the drawn balance only, not the full committed amount — which is why modeling the monthly draw curve matters more than the loan size headline. With $\overline{B}$ the average drawn balance over the build, $r$ the annual rate, and $n$ the build duration in years:

\text{Interest Reserve} = \overline{B} \times r \times n

For a 2,100 SF home with an 8-month build cycle, a typical monthly draw curve looks like this: Month 1 (foundation) — builder equity $30K, no loan draw. Month 2 (framing) — builder equity $55K, loan draw $45K. Month 3 (MEP rough) — loan draw $40K. Month 4 (insulation and drywall) — loan draw $35K. Month 5 (finish rough) — loan draw $30K. Month 6 (finish work) — loan draw $25K. Months 7–8 (punch list and close) — loan draw $25K.

The peak balance is $200K, but the average over the 8-month build is roughly:

\overline{B} \approx \$115\text{K} \quad\text{(time-weighted average)}

Total interest at SOFRSOFR — Secured Overnight Financing Rate. Post-LIBOR benchmark rate published by the New York Fed and used to price most U.S. floating-rate construction loans. + 400 bpsBasis Points (bps) — one one-hundredth of one percent. 100 bps = 1%. (roughly 8.55% all-in with SOFR around 4.55%):^{4New York Fed Secured Overnight Financing Rate (SOFR) reference data; in May 2026 SOFR ran ~4.55%, single-family spec spreads at SOFR + 275–400 bps. View SOFR}

\$115\text{K} \times 8.55\% \times \dfrac{8}{12} \approx \$6{,}550

Most builders budget $8,000 to $10,000 per home in interest carry as a conservative allowance. The difference between the budgeted reserve and actual accrual is the carry buffer for construction delays. This buffer matters: the OCC explicitly warns examiners that an appropriate interest reserve must provide sufficient funds to pay interest through the project's anticipated completion and lease-up, sale, or occupancy — not just the construction window.^{1OCC Handbook: “An appropriate interest reserve provides sufficient funds to pay interest through the project's anticipated completion and lease-up, sale, or occupancy.”}

Modeling a multi-start program with a revolving line#

A homebuilder running 4 starts per month faces a fundamentally different financing structure than a one-off spec builder. At 4 starts per month with an 8-month average cycle and 2 months to close, the builder has roughly 40 homes in process at any given time. A conventional per-home construction loan requires 40 separate loan closings per quarter, which is operationally unmanageable. Builders at this volume use a revolving construction lineRevolving Construction Line — a single credit facility with a maximum commitment under which each home is a sub-loan with its own draw schedule. As homes close and proceeds repay sub-loans, availability revolves back for new starts. instead.

A revolver is a single credit facility with a maximum commitment amount. Each home drawn under the line is a sub-loan with its own draw schedule and maturity. As homes close and sales proceeds repay sub-loans, the availability under the line revolves back for new starts. The builder models the total line utilization (sum of all outstanding sub-loan balances) as a rolling 12-month projection.

The critical output is maximum line utilization, which is the peak of the rolling balance curve. That peak determines the facility size the builder needs to negotiate with the lender. As a clean approximation:

\text{Peak Utilization} = \overline{B}_{\text{home}} \times \text{starts/month} \times \text{cycle months}

For 4 starts per month at $200K average drawn balance per home and a 10-month combined build-plus-close cycle:

\text{Peak} \approx \$200\text{K} \times 4 \times 10 = \$8.0\text{M}

The lender then adds a covenant cushion of 10 to 20 percent, so the facility needs to be $9.0M to $9.6M to avoid covenant violations during the peak utilization window. Most builders also negotiate a maximum number of sub-loans (often 20–30) and a per-home concentration limit (often 5–7% of facility) into the loan agreement.

The three mistakes that cause cash shortfalls#

First, modeling average home cycle time instead of the distribution. If 20 percent of homes take 12 months instead of 8 due to permit delays or custom changes, the line stays drawn longer than projected. Build a conservative P80 cycle time (the time by which 80 percent of homes close) into the model, not the median. The FDIC has flagged stalled projects with capitalized interest reserves as a recurring source of losses in ADC lending precisely because builders default to the median when they should be sizing for the right tail.^{5FDIC OIG, Audit Report EVAL-13-001: “Inappropriately adding extra interest reserves on loans where the underlying real estate project is not performing as expected can erode collateral protection and mask loans that would otherwise be reported as delinquent.” View source}

Second, ignoring the equity contribution timing. On a revolving line, the builder typically contributes 10 to 15 percent equity at start of each sub-loan draw. Four starts per month at $28.5K equity per start ($285K × 10%) requires:

4 \text{ starts} \times \$28.5\text{K} = \$114\text{K per month, every month}

That capital has to come from somewhere, and the source needs to be modeled explicitly, not assumed.

Third, failing to model the sales pipeline lag. Homes that close in month 10 were contracted in months 6 to 7. If sales velocity slows in months 6 to 7, the month 10 closing pace drops, the line stays utilized longer, and the facility can become temporarily unavailable for new starts. Model the sales pipeline with a 90-day lag between contract and close to see the utilization effect of a slow sales month.

The draw package the lender actually expects#

Once the line is in place, every draw request becomes a documented proof package showing the money you are asking for matches work that has actually been done. The industry-standard forms are AIA Document G702 (Application and Certificate for Payment) and its companion G703 (Continuation Sheet).^{6American Institute of Architects, G702 Application and Certificate for Payment and G703 Continuation Sheet. Industry-standard since 1992. View source} The G702 is a one-page summary capturing original contract sum, net change orders, total work completed and materials stored to date, retainageRetainage — the portion of each payment (typically 5–10%) the owner withholds until substantial completion, creating an incentive for contractor to finish the punch list. held back, and the current amount being requested.

The G703 breaks that summary into individual line items so the lender can see exactly where every dollar went. Each line item comes from the contractor's Schedule of ValuesSchedule of Values (SOV) — the contractor's allocation of the total contract sum across individual line items (foundation, framing, MEP, etc.). The G703 continuation sheet tracks completion against the SOV line by line. (SOV) and tracks scheduled value, work completed in prior periods, work completed this period, materials stored, total completed to date, percent complete, balance to finish, and retainage. The grand totals on the G703 must match Line 4 of the G702 exactly; a one-dollar mismatch triggers automatic rejection at most lenders.

Beyond the G702/G703, the lender's typical draw package includes:

Conditional lien waiverLien Waiver — a signed document where a contractor or subcontractor releases their right to file a mechanic's lien against the property in exchange for payment. from the general contractor and material subcontractors
Updated title bring-down confirming no new liens have been filed
Third-party inspection report (usually photo-documented)
Sworn statements and current insurance certificates
Approved change-order log
Invoice log tying back to the G703 line items

For a builder running 20+ active sub-loans on a single revolver, this can easily mean 50–100 lien waivers collected per draw cycle. Most institutional revolvers require lien-waiver receipt before funds release. Build the operational capacity to handle this before you sign the loan agreement, not after.

Regulatory framing: why the lender is so disciplined#

Bank examiners view interest reserves and draw discipline as the highest-risk lever in ADC lending. The FDIC's 2023 final policy statement on prudent CRE accommodations was unambiguous: when a project stalls and management fails to evaluate the collectability of the loan, interest income from the reserve can keep the loan contractually current even though principal repayment is in jeopardy — and adverse classification of the loan may be appropriate in that situation.^{7FDIC, Policy Statement on Prudent Commercial Real Estate Loan Accommodations and Workouts (2023): adverse classification may be appropriate when a stalled project's interest reserve is masking principal repayment risk. View source}

What that means in practice for a homebuilder: your lender's underwriter is required by examiner expectations to size the interest reserve to a realistic completion-plus-sell-out timeline. If your model assumes 6-month sell-out and the comp set says 9 months, expect the lender to either re-cut your reserve or hold back proceeds. The Federal Reserve's interagency guidelines reinforce this discipline by requiring every depository institution to maintain a written policy with explicit standards and limits on the use of interest reserves.^{3Federal Reserve, Interagency Guidelines on Real Estate Lending Policies: written policies must include “standards for the acceptability of and limits on the use of interest reserves.”}

FAQ#

How many draws are typical on a single-family construction loan?#

Residential construction loans typically use 5 to 7 milestone-based draws: foundation, framing, MEP rough-in, drywall, finish work, and final. Commercial projects run 12 to 24+ monthly percentage-of-completion draws over their lifespan.^{2Construction Draw Process Guide.}

What rate should I assume on a construction loan today?#

As of mid-2026, SOFR sits at approximately 4.55%, with bank construction-loan spreads of SOFR + 275 to 400 bps for institutional sponsors with strong sponsor balance sheets and stabilized rent or sales comps. That produces all-in coupons in the 7.30% to 8.55% range. Debt funds and balance-sheet non-recourse construction lenders price wider, typically SOFR + 600+ bps (10.5%+ all-in).^{4New York Fed SOFR data; spread bands per CBRE Q1 2026 lending market commentary and NAIOP Sentiment Index.} Rate caps are now a standard requirement on most institutional construction loans.

What is retainage and how does it affect my cash flow?#

Retainage is the percentage of each payment (typically 5 to 10 percent) the owner withholds until substantial completion, as a contractor performance incentive. From the builder's standpoint, retainage means even at 95% project completion you still have 5–10% of contract value sitting in retainage that you cannot draw on. Model this carefully; on a 24-unit townhome project at 10% retainage and $400K hard cost per unit, that is $960K of cash locked up at substantial completion.

Can the lender refuse to fund a draw?#

Yes, and it happens. The most common reasons: G703 totals do not match the G702 summary (auto-reject), lien waivers are missing, the inspector's percent-complete is lower than the draw request, retainage is computed at the wrong percentage, or a stop-work notice has been filed. Most reputable lenders publish their rejection criteria; build your internal QA against that checklist before submitting each draw.

What is the difference between a construction loan and a take-out loan?#

The construction loan funds the build phase and matures at substantial completion or shortly thereafter. The take-out loanTake-out Loan — a permanent loan (mortgage) that pays off the construction loan once the project is built and stabilized. For-sale projects use sale proceeds as the take-out instead. is the permanent financing — usually a long-term amortizing mortgage — that pays off the construction loan once the asset is stabilized. For-sale homebuilders use sales proceeds as the take-out (no permanent loan). Construction lenders frequently require evidence of a take-out commitment before they close.

Why does the lender want my equity in first?#

Equity in first protects the lender's collateral position. If the builder funds equity before loan draws begin, the lender is funding into a project that already has skin in the game. If the project fails, equity is wiped out before loan principal is impaired. This is interagency-guidance standard for construction lending and is rarely negotiable for first-time builders.

References

Office of the Comptroller of the Currency (OCC), Commercial Real Estate Lending — Comptroller's Handbook, Construction Lending Policies and Interest Reserves sections. occ.gov. ↩
DrawCheck, The Construction Draw Process Explained (industry overview of milestone vs percentage-of-completion draws, lender review pipeline). drawcheck.co. ↩
Federal Reserve, Interagency Guidelines on Real Estate Lending Policies, Supervisory Loan-to-Value Limits and policy requirements for interest reserves. federalreserve.gov. ↩
Federal Reserve Bank of New York, Secured Overnight Financing Rate (SOFR) Reference Data; CBRE Q1 2026 Lending Market commentary. newyorkfed.org. ↩
FDIC Office of Inspector General, Audit Report EVAL-13-001 — Acquisition, Development, and Construction Loan Concentrations and Use of Interest Reserves. fdicoig.gov. ↩
American Institute of Architects (AIA), Completing G702 and G703 Forms. aiacontracts.com. ↩
FDIC, Final Policy Statement on Prudent Commercial Real Estate Loan Accommodations and Workouts (2023). fdic.gov. ↩

Glossary

Draw Schedule: The month-by-month plan setting when a lender advances funds against verified construction progress and how much each advance is. Residential loans use 5–7 milestone draws; commercial uses monthly percentage-of-completion draws.
AIA G702 / G703: The American Institute of Architects' standard payment-application forms. G702 is the one-page summary; G703 is the line-item Schedule of Values backup. Industry standard for construction draws since 1992.
Schedule of Values (SOV): The contractor's allocation of the total contract sum across individual line items (foundation, framing, MEP, etc.). The G703 continuation sheet tracks completion against the SOV line by line.
Interest Reserve: A budget line within the construction loan that funds interest payments during the build. The OCC requires reserves to cover interest through completion and lease-up or sale; over-reliance is an examiner red flag.
Loan to Cost (LTC): Construction loan amount divided by total project cost. Federal Reserve interagency supervisory LTC limits cap 1–4 family residential construction at 85%.
Loan to Value (LTV): Loan amount divided by appraised stabilized value. Construction loans size to the lower of LTC and LTV caps.
Revolving Construction Line: A single credit facility with a maximum commitment under which each home is a sub-loan with its own draw schedule. As homes close and proceeds repay sub-loans, availability revolves back for new starts.
Lien Waiver: A signed document where a contractor or subcontractor releases their right to file a mechanic's lien against the property in exchange for payment.
Retainage: The portion of each payment (typically 5–10%) the owner withholds until substantial completion, creating an incentive for the contractor to finish the punch list before being fully paid.
Peak Utilization: The maximum outstanding balance on a revolving construction line across the modeled cycle. This number sizes the facility the builder needs to negotiate, plus a 10–20% covenant cushion.
Equity in First: Lender requirement that the borrower fund their full equity contribution before the construction loan begins to draw. Protects the lender's collateral position and is rarely negotiable.
Take-out Loan: A permanent mortgage that pays off the construction loan once the project is built and stabilized. For-sale projects use sales proceeds as the take-out instead of a permanent loan.
SOFR: Secured Overnight Financing Rate. The post-LIBOR benchmark rate published by the New York Fed and used to price most U.S. floating-rate construction loans.
Basis Points (bps): One one-hundredth of one percent. 100 bps = 1%. Used to quote spreads above a benchmark rate.
Spec Home / Speculative Build: A home built without a contracted buyer in place, intended for sale upon completion. Carries higher risk for the lender and typically higher spreads.
ADC Lending: Acquisition, Development, and Construction lending. The regulatory umbrella term for the loan category that includes raw-land, horizontal-development, and vertical-construction loans.
Punch List: The final list of small items a contractor must complete before substantial completion is declared and final payment (including retainage) is released.
Certificate of Occupancy: The municipal authorization that a building is safe to occupy. Required before final draw release and home closing.

River models the full revolving construction line draw schedule as part of every homebuilder development pro forma. Monthly peak utilization, equity deployment curve, and interest carry are all built in so you can size your credit facility correctly before you walk into the lender's office.

Construction Loan Draw Schedule: A Homebuilder's Guide