New Construction Loans: How to Finance Ground-Up Development Projects

What Is a Construction Loan?

A construction loan is short-term financing used to fund the building of a new property. Unlike traditional mortgages, construction loans disburse funds in stages (draws) as construction progresses.

Types of Construction Loans

1. Construction-to-Permanent

One loan that converts from construction to permanent mortgage upon completion. Single closing saves on costs.

2. Stand-Alone Construction

Separate construction loan that must be paid off or refinanced upon completion. More flexible but requires two closings.

3. Spec Construction Loans

For builders constructing without a buyer lined up. Higher rates reflect additional risk.

Construction Loan Structure

Draw Schedule

Funds are released in stages as work is completed:

1. Land/Foundation: 10-15%
2. Framing: 15-20%
3. Rough Mechanicals: 15-20%
4. Interior Finishes: 20-25%
5. Final Completion: 20-25%

Interest-Only Payments

During construction, you only pay interest on funds drawn. This keeps payments manageable while building.

Construction Loan Requirements

The Construction Loan Process

Phase 1: Pre-Approval

Submit land details, plans, budget, and builder information.

Phase 2: Underwriting

Lender reviews plans, costs, and project feasibility.

Phase 3: Closing

Fund initial draw for land acquisition or construction start.

Phase 4: Construction

Builder requests draws as milestones are completed. Inspector verifies work.

Phase 5: Completion

Receive certificate of occupancy. Refinance or convert to permanent loan.

Key Construction Loan Metrics

Loan-to-Cost (LTC)

Percentage of total project cost the lender will finance. Example: $400K loan on $500K project = 80% LTC

Loan-to-Value (LTV)

Loan amount compared to completed property value. Example: $400K loan on $600K finished value = 67% LTV

Tips for Construction Loan Success

1. Detailed Budget

Line-item construction budget helps underwriting and prevents cost overruns.

2. Experienced Builder

Work with a licensed, insured contractor with a track record.

3. Contingency Reserve

Build in 10-15% contingency for unexpected costs.

4. Realistic Timeline

Delays are common. Plan for 20% longer than expected.

Common Construction Loan Mistakes

• Underestimating costs - Get multiple contractor bids
• Skipping permits - Unpermitted work creates lien issues
• Inexperienced builder - Vet your contractor thoroughly
• No contingency - Surprises always happen in construction

Ready to build? Our construction loans offer up to 85% LTC with competitive rates.