How construction loan draws actually work: earned value, draw requests, and the interest meter

The biggest surprise in a construction loan isn't the rate — it's that you never get the money. Not all at once, anyway. The bank approves $425,000 and then hands it over in pieces, draw by draw, only as the work goes in, only what the inspection supports, while an interest meter runs on every dollar already funded. Builders live inside this rhythm; owner-builders and first-time custom-home clients usually meet it mid-project, unprepared, when a draw request bounces or the interest line starts eating a reserve they didn't know they had.

Here's the machinery, plainly: what a draw schedule is, how a draw request is computed, why the interest math only bites funded dollars, and the two set-asides that quietly shrink your construction budget before the first shovel.

The loan funds work, not plans

A construction lender's core rule is that the money follows the work. The collateral is a building that doesn't exist yet, so the bank protects itself by funding progressively: you (or your builder) complete work, request a draw against it, the lender's inspector confirms the progress, and the funds release. If the framing is 60% done, the framing line funds up to 60% — not what you've spent, not what you're about to spend, but what's demonstrably in place. Your receipts, your contracts, your enthusiasm: none of it moves money. The inspection does.

The draw schedule: budget × % complete = earned

The draw schedule is the loan's backbone — the construction budget broken into phases (sitework, foundation, framing, roofing, mechanicals, finishes…), each with a budget amount. Progress is measured per line, and the arithmetic is the same earned-value logic commercial construction uses on its pay applications:

• EARNED = budget × % complete. A $68,000 framing line at 60% complete has earned $40,800.
• THIS DRAW = earned − previously drawn. If $25,000 of framing money was funded on earlier draws, the current request for that line is $15,800.
• Sum the lines and that's the draw request — the same shape as a G702-style application, just owner-scale.

Two habits keep a draw schedule honest. First, never let a line draw ahead of its percent complete — a line funded beyond the work in place is exactly what the inspector exists to catch, and it stalls the whole draw. Second, track previously drawn per line, not just in total, or by mid-project nobody can say which money bought which work.

The interest meter: you pay on what's funded, from the day it funds

During construction you typically pay interest-only, and only on the outstanding (funded) balance — not the full loan amount. Most construction notes accrue it daily. The common convention:

interest for a period = balance × rate ÷ 365 × days

Worked example: your funded balance is $180,000, the note is at 8.25%, and 31 days pass before the next draw. That's $180,000 × 0.0825 = $14,850 a year ÷ 365 = $40.68 a day × 31 days = $1,261.23 for the period. Then the next draw funds, the balance steps up, and the daily rate steps up with it — a staircase that climbs all the way to closing. (Your note's exact convention — 365, 360, monthly — is in your loan documents; the documents govern.)

The two set-asides: interest reserve and contingency

Two pieces of the loan usually never reach the jobsite. The interest reserve is a slice the lender sets aside to pay those monthly interest charges during construction — convenient, because the project pays its own carrying cost, but it means the reserve is a fuel tank: delays and a rising balance burn it faster, and if it runs dry before closing, the payments come out of your pocket. The contingency is the cushion for overruns, often released only against documented extra cost. So the real number to build against is:

available for construction = loan amount − interest reserve − contingency

Sizing the budget to the loan amount instead of the available-for-construction number is one of the classic owner-builder mistakes — the budget looks fine and is short by two set-asides from day one.

What to track, the whole loan long

• The draw schedule — budget, % complete, earned, previously drawn, this request, per line.
• The draw log — every draw with its date and the running outstanding balance (pending draws aren't funded; don't count them until they are).
• The interest chain — each period's charge computed off the balance and days, plus the cumulative total measured against the reserve: months of reserve left is a number you want to see coming, not discover.
• Budget fit — construction budget vs. available-for-construction, rechecked whenever anything changes.

The same discipline, up and down the job

If the earned-value arithmetic feels familiar, it should — it's the residential cousin of the schedule of values on a commercial payment application, where contractors bill exactly this way and retainage holds a slice back until the end. And once draws are funding the work, job costing answers the question the bank never asks: whether the money that funded is buying the job you budgeted. Different documents, one idea — money follows measured work.

This is general educational guidance on how construction loans commonly work, not lending, financial, legal, or tax advice. Terms vary by lender and loan: your note, your draw procedures, your lender's inspections and statements govern. Sample figures are illustrative.