Ground-Up Construction Loans

Private construction loans finance the land (or lot payoff) and the hard and soft costs of building, with funds advanced in draws as inspections confirm progress. They move far faster than bank construction lending and tolerate spec builds, but they price for the risk: construction is the one segment where most lenders insist on a track record.

How construction loans are sized

Lenders look at loan-to-cost (total project budget including land, soft costs, contingency and interest reserve) and loan-to-completed-value. A typical structure is 85% of cost capped at 70% of the completed appraised value, with the land advance limited to 50–75% of the lot's value or purchase price. An interest reserve for the full term is usually built into the loan so there are no out-of-pocket payments during construction.

Draw schedule mechanics

The budget is broken into line items — foundation, framing, rough mechanicals, drywall, finishes — and funds release after each milestone is inspected. Expect a 5–10% retainage held to completion, inspection fees of $200–$400 per draw, and 2–5 business days from request to wire at a well-run lender. Change orders need lender approval, and a 10% contingency line prevents a stalled project.

What lenders require

• Approved plans and permits (or permit-ready status) at closing.
• General contractor with license, insurance and references; owner-builders are accepted by fewer lenders.
• Detailed budget and construction timeline; builder's risk insurance.
• Liquidity for the down payment and a contingency, plus 660+ credit.
• Experience: one or more completed ground-up projects for best terms; first-time builders can qualify with a strong GC and more equity.

Frequently asked questions

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