How are funds released in a construction loan?

In the context of a construction loan, funds are generally released based on reaching specific construction benchmarks. This method is known as a "draw schedule" and aligns the disbursement of funds with the progress of the construction work. As each phase of construction is completed—such as obtaining a foundation, framing, or completing the roofing—an inspection may be conducted to verify the work done. Upon successful inspection and confirmation of completion of that phase, the lender releases the funds corresponding to that benchmark.

This approach helps protect both the lender and the borrower, ensuring that money is allocated responsibly and that construction meets quality expectations before additional funding is provided. It mitigates risk for the lender since they can verify that the project is progressing as planned, and it helps the borrower manage cash flow throughout the construction process. Other methods such as releasing funds all at once or after full project completion do not allow for oversight of ongoing work and can lead to risks for lenders if the construction does not proceed as expected.