Ground-Up Construction Financing: How Draw Schedules Actually Work (2026 Guide)

Building from the ground up is one of the most profitable moves in real estate — but it is also one of the most misunderstood when it comes to financing. Most builders and developers know they need a construction loan. Far fewer understand how the money actually flows once they close. That gap between expectation and reality is where projects stall, relationships with lenders sour, and timelines blow up.

This guide breaks down how ground-up construction loans work, how draw schedules are structured, what lenders look for in 2026, and how to position yourself for the smoothest possible funding experience. If you are planning a spec home, a small multifamily build, or a commercial ground-up project, read this before you submit a single application.

Ready to explore your construction financing options? Start at slatefinancial.io/apply and get matched to lenders who fund ground-up deals.

What Is a Ground-Up Construction Loan?

A ground-up construction loan is a short-term financing instrument used to fund the development of a new structure on raw or cleared land. Unlike a fix-and-flip loan — where you are improving an existing structure — ground-up financing covers everything from foundation to certificate of occupancy.

These loans are almost always interest-only during the construction period, and the principal is drawn down in stages rather than paid out as a lump sum at closing. That staged release is the draw schedule, and understanding it is the single most important thing a builder can learn before breaking ground.

Terms typically run 12 to 24 months, with extensions available if construction runs long. Once the project is complete, borrowers either sell (on spec builds) or refinance into a permanent loan (on rentals or owner-occupied builds). Funding is subject to lender approval.

How Draw Schedules Work

A draw schedule is a pre-agreed timeline that defines when funds are released and what milestone must be verified before each release. Think of it as a payment plan in reverse: the lender holds the full approved amount in a controlled account and releases portions as the build progresses.

Here is a typical draw structure for a single-family spec home:

Draw 1: Foundation (15-20% of loan)

Released after the foundation is poured and inspected. The lender — or their appointed inspector — verifies that the slab or foundation walls meet plan specifications before funds are released. This draw often covers site prep, permits, and foundation costs.

Draw 2: Framing (20-25% of loan)

Released after the frame is up and rough plumbing, electrical, and HVAC are roughed in. At this stage, the structure is visible and verifiable. Inspectors confirm that work matches the approved plans.

Draw 3: Drywall and Exterior (15-20% of loan)

Released after drywall is installed, exterior is sheathed, and windows and doors are in. This is often the point where weather-tightness can be confirmed, which matters for lenders managing collateral risk.

Draw 4: Interior Finish and Mechanicals (20-25% of loan)

Released after flooring, cabinets, trim, fixture rough-ins, and mechanical systems are complete. This draw covers the largest concentration of subcontractor costs and is often the one where cash flow gets tight if not planned carefully.

Draw 5: Certificate of Occupancy (10-15% of loan)

The final draw, released once the local authority issues the certificate of occupancy. Some lenders hold a small retainage — 5 to 10% of the final draw — until all punch list items are cleared. This draw is your finish line.

The exact percentages and milestone definitions vary by lender, loan size, and project type. Multifamily and commercial builds often have 6 to 10 draws. Smaller residential projects may compress to 3 or 4.

What Lenders Look for in 2026

Ground-up construction is considered higher risk than rehab lending because there is no existing structure serving as collateral during the build. Lenders compensate for that risk with tighter underwriting standards. Here is what most institutional construction lenders are looking at right now:

Experience

This is the biggest filter. Lenders want to see that you have completed similar projects before. First-time builders face the steepest uphill climb. If you are new to ground-up construction, partnering with an experienced general contractor who has a track record — and being transparent about that partnership — is often the fastest path to approval. Funding is subject to lender approval and experience requirements vary.

Detailed Project Budget

A line-item budget is not optional. Lenders want to see every cost accounted for: land, permits, foundation, framing, mechanical, finishes, contingency. They will compare your numbers against regional cost benchmarks. If your budget is vague or understated, expect a counteroffer or a decline.

Approved Plans and Permits

Most lenders require that building permits be pulled before closing — or at minimum that plans have been approved by the local authority. Some will lend on a pre-permit basis for experienced borrowers, but that is the exception, not the rule in 2026.

After-Construction Value (ACV)

Lenders underwrite to the completed value of the project, not the land value or the cost of construction. They will order an appraisal based on your approved plans and comparable sales. The loan-to-value on the completed project typically caps at 65 to 75%. If your projected ACV does not support the loan amount you need, you will need to either increase your equity contribution or reduce the project scope.

Contractor Vetting

Most lenders will vet your general contractor. They want to see licensing, insurance, references, and often a contractor financial statement. A strong GC relationship is a genuine competitive advantage in the construction loan market.

The Draw Inspection Process: What Most Builders Underestimate

Every draw triggers an inspection. The lender sends a third-party inspector to verify that the claimed work is actually complete and matches the approved plans. This process takes time — typically 5 to 10 business days from draw request to funds in your account.

Builders who underestimate inspection timelines run out of cash between draws. The fix is simple: submit your draw request 2 weeks before you actually need the money. Build that buffer into your construction schedule from day one.

Draw requests that come back with deficiencies — incomplete work, work not matching plans, uninspected work — get kicked back. That adds another cycle. Inspectors are not adversaries; treat them as partners and communicate clearly about what has been completed and what is in progress.

Interest Reserves: The Hidden Line Item

During construction, you owe interest on every dollar drawn — not on the full loan amount. Many construction loans build an interest reserve into the loan itself, so that interest payments are funded from the loan and do not come out of your pocket during the build.

This is a significant advantage for cash flow management, but it does increase your total loan amount and reduce the net proceeds available for construction costs. Make sure you understand whether your loan includes an interest reserve and how it is calculated before you close.

Construction-to-Permanent Loans vs. Two-Close Financing

There are two primary structures for ground-up financing:

Two-Close Financing: You get a standalone construction loan, build the project, then apply for a separate permanent loan (DSCR, conventional, portfolio) to pay off the construction loan. This is the most common structure. It gives you flexibility to shop the permanent loan at completion but requires you to qualify and close twice.

Construction-to-Permanent (C-to-P): A single loan that converts from construction to permanent financing at the certificate of occupancy — one closing, one set of fees. C-to-P is less common in the investor space but is increasingly available for builders who intend to hold the completed asset as a rental. Funding is subject to lender approval and program availability varies by lender.

Common Mistakes That Kill Ground-Up Deals

• Underbudgeting contingency. Industry standard is 10 to 15% contingency on top of your hard cost estimate. Builders who skip contingency run out of money in Draw 4 every time.
• Submitting draws for incomplete work. Inspectors will catch it. It signals inexperience and can trigger a default notice.
• Ignoring the interest reserve. If your loan does not include one, you need cash reserves to cover interest during the build. Failing to account for this is a recurring cash flow crisis.
• Contractor disputes mid-build. Lenders take this seriously. A GC who walks off the job can trigger a loan default. Vet your contractor thoroughly and have a replacement plan.
• Underestimating permit timelines. Some markets are running 6 to 12 months on permit approvals. If your lender requires permits before closing, that timeline directly impacts your project start date.

How to Apply for Ground-Up Construction Financing

Getting matched to the right lender for a ground-up build starts with presenting a clean, complete package. Here is what you need to have ready:

• Executed or contingent purchase contract for the land (if not already owned)
• Approved architectural plans or schematic drawings
• Line-item project budget with contractor bids
• GC license, insurance certificate, and references
• Your real estate track record (completed projects, current portfolio)
• Entity documents (LLC or corp operating agreement, EIN)
• Personal financial statement and credit authorization

The more complete your package, the faster lenders can underwrite and the better your terms will be. Gaps in documentation are the number-one cause of deal delays in the construction lending space.

Apply at slatefinancial.io/apply and get your project in front of lenders who specialize in ground-up construction. We work with builders across Florida, Texas, Georgia, South Carolina, and nationwide.

Bottom Line

Ground-up construction financing is not complicated — but it is detailed. The draw schedule is not a bureaucratic obstacle; it is the mechanism that protects both you and your lender throughout the build. Builders who understand how draws work, how inspections are triggered, and how to manage cash flow between disbursements consistently outperform those who are surprised by the process.

If you are planning a ground-up project and need to understand your financing options, start with a conversation. There is no obligation, and the right lender match can save you points and months of headache.

Ready to fund your next deal? Apply in 2 minutes at slatefinancial.io/apply. All funding is subject to lender approval.

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