How Construction Draws Work in Hard Money Lending
A detailed guide to construction draws - how to request them, what to expect during inspections, and tips for smooth renovation financing.
Dan McColl
Director of Construction Lending
Understanding Construction Draws
When you get a hard money loan for a renovation project, your renovation budget isn't handed to you upfront. Instead, funds are disbursed in stages as work is completed. These disbursements are called "draws."
This protects both you and the lender by ensuring money goes toward completed work, not abandoned projects.
How the Draw Process Works
1. Initial Loan Structure
When your loan closes, it's structured in two parts:
●Acquisition funds - Disbursed at closing to purchase the property
●Renovation holdback - Held in reserve for construction draws
Example:
●Purchase price: $400,000
●Renovation budget: $100,000
●Total loan: $500,000
●At closing: $400,000 disbursed
●Holdback: $100,000 for draws
2. Work Completion
You complete work according to your approved budget:
●Hire contractors
●Order materials
●Complete phases of renovation
3. Draw Request
When a phase is complete, you request a draw:
●Submit draw request form
●Provide photos of completed work
●List work completed and amounts
4. Inspection
The lender verifies work completion:
●In-person inspection OR
●Photo/video verification
●Comparison to approved budget
5. Funds Disbursement
Once verified, funds are released:
●Typically within 24-48 hours
●Wired to your account
●Ready to pay contractors
Draw Schedule Example
Here's how a typical $100,000 renovation might break down:
| Draw | Work Completed | Amount | Running Total |
|---|---|---|---|
| 1 | Demo, framing, rough plumbing | $25,000 | $25,000 |
| 2 | Electrical, HVAC, insulation | $25,000 | $50,000 |
| 3 | Drywall, trim, cabinets | $25,000 | $75,000 |
| 4 | Flooring, fixtures, paint | $20,000 | $95,000 |
| 5 | Final punch list, landscaping | $5,000 | $100,000 |
Types of Draw Structures
Percentage Complete
Draws based on percentage of overall project completion.
●Draw 1: 25% complete = 25% of budget
●Most flexible approach
Line Item Based
Draws tied to specific budget line items.
●Complete plumbing = receive plumbing budget
●More granular tracking
Milestone Based
Draws at predetermined project milestones.
●Foundation complete = Draw 1
●Framing complete = Draw 2
●Clearer expectations
What Inspectors Look For
During draw inspections, inspectors verify:
Work Quality
●Meets code requirements
●Professional installation
●Matches scope of work
Work Completion
●Percentage complete matches draw request
●Materials installed as specified
●No outstanding work claimed as complete
Budget Adherence
●Work matches approved budget
●Change orders properly documented
●No material variances
Tips for Smooth Draws
1. Front-Load Your Budget
Structure your budget so early draws are larger. This gives you working capital when you need it most.
2. Document Everything
Photos before, during, and after each phase. Time-stamped photos prevent disputes.
3. Communicate Proactively
Let your lender know about changes before inspection, not after. Change orders should be pre-approved.
4. Keep Contractors Informed
Make sure contractors know the draw process. They should complete work to draw milestones.
5. Plan for Timing
Don't wait until contractors are demanding payment. Request draws before cash flow gets tight.
Common Draw Issues and Solutions
Issue: Work Not Complete
Problem: Inspector finds work isn't as complete as requested.
Solution: Only request draws for fully completed work. Over-communicate with contractors.
Issue: Quality Problems
Problem: Inspector notes work doesn't meet standards.
Solution: Use qualified contractors. Address quality before requesting draws.
Issue: Budget Overruns
Problem: Actual costs exceeding budget.
Solution: Build 10-20% contingency. Request change orders early.
Issue: Timing Delays
Problem: Contractors need payment but draw takes time.
Solution: Use personal reserves for float. Request draws promptly.
Change Orders
When project scope changes, you'll need a change order:
What Triggers Change Orders
●Unexpected conditions (hidden damage, code issues)
●Scope additions (buyer wants upgrades)
●Material substitutions
●Design changes
Change Order Process
1. Identify need for change
2. Get contractor estimate
3. Submit change order request to lender
4. Lender reviews and approves
5. Work proceeds with modified budget
Tips for Change Orders
●Request before doing the work
●Provide detailed justification
●Include updated budget impact
●Get in writing
Draw Processing at Trinity
Here's how we handle draws:
Speed
●24-48 hour turnaround typical
●Same-day for urgent situations
●Direct wire to your account
Flexibility
●Photo verification for smaller draws
●In-person for larger amounts
●Work with your schedule
Communication
●Dedicated construction team
●Direct lender relationship
●Proactive updates
The Bottom Line
Construction draws protect everyone:
●You get funded renovation capital
●Lenders ensure funds go to completed work
●Projects stay on track and on budget
Understanding the draw process before you start makes renovation financing smooth and predictable.
