Construction Mortgage

A construction mortgage — also called a draw mortgage — is financing for a new build in which the lender advances the money in stages as construction progresses, rather than in a single lump sum at closing. Each advance is a draw, released only after the lender confirms the completed stage matches the plans and budget.

Because the finished home does not yet exist as security, construction financing is structured differently from an ordinary purchase mortgage. It is usually short term and interest-only, and it is almost always paired with a commitment to convert into a standard mortgage once the build is finished.

How the draws are released

Draw schedules vary by lender and by project, but most follow the same sequence:

Land or initial advance, released when the lot is owned or being acquired
Foundation and site services
Framing and lock-up
Interior rough-in, such as electrical, plumbing and heating
Finishing, occupancy and the final holdback

Every draw is normally supported by an inspection or a signed certificate from the builder, and the lender may require a survey or appraisal at each stage. A progress draw is simply one of these staged releases; a holdback is the portion the lender withholds until the work is fully complete and any lien period has run.

What it costs and why it matters

During construction the borrower typically pays interest only on the amount actually advanced, so payments rise as the build advances. Rates on construction financing are often higher than on a completed-home mortgage, and there may be a commitment fee plus per-draw inspection costs. When the home is finished, the loan is usually repaid by a take-out mortgage. Borrowers should plan for closing costs at that conversion, and high-ratio take-out financing is subject to mortgage default insurance and the federal mortgage stress test.

What lenders look for

Approval usually depends on a fixed-price contract with a licensed builder, approved plans and permits, a realistic budget and schedule, clear title to the land, and evidence the borrower can carry the interim interest. Lenders may also review the builder's own track record and financing, and self-built projects are generally harder to finance than builds handled by an established builder.

Frequently asked questions

What is a draw mortgage?

A draw mortgage is another name for a construction mortgage. The lender commits to a total amount, then releases it in stages — called draws — as the build reaches agreed milestones. The borrower pays interest only on the funds advanced, and the loan is normally converted into a regular mortgage once the home is complete and occupied.

Do I pay interest during construction?

Typically yes. Interest is charged only on the amount drawn rather than the full commitment, so payments generally rise as construction advances. Some borrowers pay that interim interest from savings, while others arrange to have it capitalized. Terms vary by lender, so confirm how interim interest is handled before signing.

What happens when the house is finished?

The construction loan is usually repaid by a take-out mortgage, which is arranged at the outset. The lender inspects the finished home, confirms occupancy, and releases the final holdback. Because the take-out loan is a new mortgage, qualification rules such as the stress test and default insurance requirements apply at that stage.