Ground-Up Construction Financing: How Draw Schedules Work (And Why They Matter for Your Build)

Building from scratch 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 investors who have only done fix-and-flip deals assume construction financing works the same way: borrow the money, close the deal, repay when you sell.

It does not work that way. Ground-up construction loans operate on a completely different logic, and the heart of that logic is something called a draw schedule. If you do not understand draw schedules before you break ground, you will run out of cash mid-build, miss contractor payments, and potentially lose the project entirely.

This guide breaks down how ground-up construction financing actually works — what lenders look for, how draws are structured and released, and how to set your project up for funding success. If you are ready to explore your options, apply at slatefinancial.io/apply and a specialist will reach out within one business day.

What Is Ground-Up Construction Financing?

Ground-up construction financing (also called a construction loan or new construction loan) is short-term funding used to build a property from an empty lot or a tear-down. Unlike a traditional mortgage, which pays for a property that already exists, a construction loan funds the building process in stages.

The loan is typically structured with:

• A 12 to 24 month term (the build period)
• Interest-only payments during construction
• Funds disbursed in draws, not as a lump sum
• A balloon payoff at maturity via sale or refinance

This is fundamentally different from a fix-and-flip loan, where the full amount is wired at closing. With construction financing, the lender holds all the capital and releases it incrementally as milestones are hit. That is where the draw schedule comes in.

What Is a Draw Schedule?

A draw schedule is a pre-agreed timeline that defines when and how much money gets released to the borrower based on construction milestones. Think of it as a payment plan — but in reverse. Instead of you paying a lender, the lender pays out your project funds as you prove progress.

A typical five-draw schedule for a new single-family home might look like this:

• Draw 1 (Foundation) — 15-20% of loan: Released after foundation is poured and inspected. Covers site prep, excavation, forms, and concrete.
• Draw 2 (Framing) — 20-25% of loan: Released once framing is up and roof is decked. This is often the largest draw because labor and lumber costs peak here.
• Draw 3 (Rough-ins) — 20-25% of loan: Released after electrical, plumbing, and HVAC rough-ins are inspected. The building is enclosed but not finished.
• Draw 4 (Drywall and Finishes) — 20-25% of loan: Released when drywall is hung and taped and interior finishes are underway (flooring, cabinets, fixtures).
• Draw 5 (Certificate of Occupancy) — 10-15% of loan: The final draw, released when the CO is issued. This is your project completion milestone.

The exact percentages vary by lender, project type, and loan size. Larger custom builds may have seven to ten draws. Spec homes in active subdivisions sometimes run on a three-draw structure. The lender sets the terms, and you negotiate from there — or you work with a broker who does that legwork for you.

How Draw Inspections Work

Before any draw is released, the lender sends an inspector (or a third-party draw management service) to verify that the milestone has been reached. This inspection is not optional and is not a formality. If the inspector says the framing is only 60% complete, you get 60% of the framing draw. The rest holds until the work is done.

This matters enormously for cash flow management. Contractors expect payment on their schedule, not the lender’s inspection schedule. If you have not accounted for the gap between when work is done and when the inspector shows up (which can be 3 to 10 business days), you may find yourself bridging contractor invoices out of pocket or from reserves you did not plan to touch.

The fix: build an inspection buffer into your schedule and maintain a working capital reserve of at least 5 to 10% of total project cost. Many experienced builders keep one draw ahead in their own cash, using each lender draw to replenish reserves rather than fund the next round of work in real time.

What Lenders Look for in a Ground-Up Construction Deal

Construction lending is riskier than standard bridge or hard money lending because the collateral does not fully exist yet. That means underwriting is tighter. Here is what most private construction lenders and institutional hard money sources evaluate:

Loan-to-Cost (LTC)

Most lenders fund 70 to 80% of total project cost (land plus construction budget). If your all-in cost is $500,000, expect the lender to fund $350,000 to $400,000. You are expected to bring equity to the table — your skin in the game.

Loan-to-ARV (After-Repair Value)

Lenders also cap at 65 to 75% of the property’s projected value at completion. If your finished home will appraise at $700,000, the maximum loan is typically $455,000 to $525,000. The tighter of LTC and LTV/ARV governs what you actually get.

Experience

First-time ground-up builders face a steeper climb than experienced developers. Lenders want to see that you have completed comparable projects — or that your general contractor has, and that you have a strong GC relationship. Showing a detailed budget, a qualified contractor, and a realistic timeline goes a long way toward building lender confidence.

Credit and Liquidity

While private lenders are more flexible than banks, most still want to see a FICO above 620 and enough reserves to carry the project if a draw is delayed. Funding is subject to lender approval, and terms will vary based on your credit profile, experience level, and project strength.

A Realistic Budget and Timeline

Vague estimates kill construction deals. Lenders want a line-item construction budget, a signed contract with a licensed GC (in most states), and a realistic completion timeline. Projects that are underbudgeted on paper — and then need draw increases mid-build — are a significant lender risk.

Construction-to-Permanent vs Short-Term Construction Loans

One of the biggest decisions you will make is whether to use a short-term construction loan (with a planned exit via sale or refinance) or a construction-to-permanent loan that converts to long-term financing at completion.

Short-term construction loans are typically offered by private lenders and hard money shops. They are faster to close (often 5 to 15 days), more flexible on credit, and designed for investors who plan to sell the finished product. They carry higher rates — generally 10 to 14% — but the total interest cost is manageable given the 12 to 18 month hold.

Construction-to-perm loans are offered by banks, credit unions, and some institutional lenders. They lock in your long-term financing at the start — meaning you refinance into a 30-year mortgage (or a DSCR rental loan) automatically at completion. They require stronger credit and more documentation, but they eliminate refinance risk and can save significant transaction costs if you are holding the property as a rental.

The right choice depends on your exit strategy. Selling the finished product? Short-term is usually faster and easier. Building a rental? Construction-to-perm or a DSCR bridge loan at completion may be the smarter path. A funding specialist can model both scenarios for your specific deal. Apply at slatefinancial.io/apply and we will run the numbers.

Common Mistakes That Derail Construction Loans

After working with hundreds of real estate investors, here are the mistakes that kill construction deals most often:

• Underestimating contingency. 10% contingency is the minimum. In today’s material cost environment, 15% is smarter. If you do not need it, great. If you do and do not have it, you are in trouble.
• Choosing an unlicensed or inexperienced GC. Lenders verify contractor credentials. An unlicensed GC can stop your loan from closing — and stop your project if they walk mid-build.
• Not accounting for carrying costs. Interest payments, insurance, permits, and property taxes during the build period add up fast. Budget these as hard costs, not afterthoughts.
• Ignoring draw timing in your contractor schedule. Brief your GC on how draws work before you start. Contractors who expect weekly payment cycles will be frustrated by a 10-day inspection window unless expectations are set upfront.
• Starting construction before the loan closes. Lenders treat pre-start work as a red flag. Some will refuse to fund a project where ground has already broken. Always close the loan before the first shovel goes in.

How to Get Started

Ground-up construction financing is more available than most investors realize — especially for experienced builders in active real estate markets across Florida, Texas, Georgia, and the Southeast. Private lenders and non-bank construction shops have largely filled the gap left by traditional banks, and they move fast.

To position your deal for approval, come prepared with:

1. A clear project scope and timeline
2. A line-item construction budget
3. A signed contract with your GC (or a term sheet)
4. Comparable sales supporting your ARV
5. Your credit profile and liquidity documentation

If you have the land and a plan, there is financing available. The draw schedule is not the obstacle — it is the structure that keeps your build funded milestone by milestone all the way to CO.

Ready to fund your next ground-up build? Apply in 2 minutes at slatefinancial.io/apply. A specialist will review your project and match it to lenders who fund new construction in your market. Funding is subject to lender approval and borrower qualifications.

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