In a typical construction loan, how are funds typically disbursed?

In a typical construction loan, funds are disbursed in installments at various stages of construction. This method is commonly known as a "draw schedule." The reasoning behind this approach is to align the release of funds with the progress of the construction project, ensuring that the lender provides financing only for work that has already been completed. This reduces the risk for the lender, as they are not advancing the entire amount without any assurance of the project's progress.

Disbursing funds in installments also helps manage the construction budget effectively. Contractors can receive funds as they reach designated milestones—such as completing the foundation, framing, or obtaining the roof—allowing for a controlled and efficient flow of capital that supports ongoing construction efforts.

In contrast, advancing the full loan amount before construction begins would pose significant risks to the lender, as there would be little assurance the funds would be used appropriately or that the project would be completed. Likewise, providing funds only after construction is completed could significantly hinder progress, as the contractor would not have the necessary capital to pay for ongoing expenses. Lastly, charging interest on the total amount of the loan from the beginning does not align with the typical structure of construction loans, as the borrower generally only pays interest on the amounts drawn down, not the