Construction Loans
Everything you need to know about financing your next build.
What is a Construction Loan?
A construction loan is short-term financing used to build or renovate a property. Unlike traditional mortgages:
- Funds are released in draws as construction milestones are completed
- Interest-only payments during the build period
- Converts or refinances to permanent financing upon completion
- Higher rates than permanent mortgages due to increased risk
Types of Construction Loans
Ground-Up Construction
New building from raw land or cleared lot.
| Feature | Details |
|---|---|
| Term | 12-24 months |
| LTC | Up to 85% |
| LTV (as-complete) | Up to 75% |
| Rate | 10%-14% |
| Best For | Spec homes, custom builds, small developments |
Renovation/Rehab Construction
Major renovations to existing structures.
| Feature | Details |
|---|---|
| Term | 12-18 months |
| LTC | Up to 90% |
| LTV | Up to 75% |
| Rate | 10%-13% |
| Best For | Gut rehabs, additions, conversions |
Construction-to-Permanent (One-Time Close)
Single loan that converts to permanent mortgage.
| Feature | Details |
|---|---|
| Term | Construction + 30 years |
| LTC | Up to 80% |
| LTV | Up to 75% |
| Rate | Locked at origination |
| Best For | Owner-occupied, custom homes |
The Construction Loan Process
Step 1: Pre-Qualification
Timeline: 1-3 days
Provide:
- Project overview and location
- Estimated budget and timeline
- Your experience and financials
- Exit strategy
Outcome: Loan amount estimate and preliminary terms
Step 2: Full Application
Timeline: 3-7 days
Submit:
- Detailed construction budget
- Architectural plans and specs
- Permits or permit-ready status
- GC contract and resume
- Personal financial statement
- Entity documents
Step 3: Underwriting
Timeline: 5-14 days
Lender reviews:
- Appraisal (as-is and as-complete value)
- Budget feasibility
- Comparable sales
- Builder qualifications
- Market conditions
Step 4: Approval & Closing
Timeline: 3-7 days
Final steps:
- Clear any conditions
- Final budget approval
- Title and insurance
- Sign loan documents
- Initial draw funding
Total Timeline: 14-30 days
Construction Loan Requirements
Borrower Requirements
| Requirement | Minimum | Preferred |
|---|---|---|
| Credit Score | 660 | 700+ |
| Liquidity | 10% of loan | 15%+ of loan |
| Net Worth | 1x loan amount | 1.5x+ |
| Experience | 1 project | 3+ projects |
Project Requirements
| Requirement | Details |
|---|---|
| Permits | In-hand or permit-ready |
| Plans | Complete architectural + engineering |
| Budget | Detailed line-item budget |
| Timeline | Realistic construction schedule |
| GC Contract | Fixed-price or cost-plus with cap |
Property Requirements
- Zoned for intended use
- Utilities available or budgeted
- Clear title
- Environmental clearance
- No special flood zone (or proper mitigation)
The Draw Process
How Draws Work
- Complete construction milestone (e.g., foundation poured)
- Submit draw request with invoices and lien waivers
- Inspector verifies work completion
- Lender approves and releases funds
- Pay subcontractors and suppliers
Typical Draw Schedule
| Draw # | Milestone | % Released |
|---|---|---|
| 1 | Land payoff + permits | 20-25% |
| 2 | Foundation complete | 10-15% |
| 3 | Framing + roof dried in | 20-25% |
| 4 | MEP rough-in | 10-15% |
| 5 | Drywall + interior | 15-20% |
| 6 | Finishes + CO | 5-10% |
Draw Tips
- Submit early in the week - Avoid Friday delays
- Include all documentation - Invoices, lien waivers, photos
- Build inspector relationship - They control your cash flow
- Plan for gaps - 3-7 days between request and funding
Interest & Payments
Interest-Only Period
During construction, you only pay interest on funds drawn:
Example:
- $500K loan, $200K drawn
- 12% annual rate
- Monthly interest = $200K × 12% ÷ 12 = $2,000/month
Interest Reserve
Most loans include pre-funded interest:
- Built into loan amount
- Covers 12-18 months of interest
- You don't make payments during construction
- Saves cash flow for the build
Example:
- $500K construction loan
- 12% rate, 12-month term
- Interest reserve = ~$30K (adds to loan)
Costs & Fees
Typical Closing Costs
| Fee | Amount |
|---|---|
| Origination Points | 1.5-3.0% |
| Appraisal | $2,500-$5,000 |
| Inspection Fee | $150-$250 per draw |
| Title Insurance | $2,000-$5,000 |
| Recording Fees | $500-$1,500 |
| Legal Fees | $1,500-$3,000 |
Ongoing Costs
| Cost | Frequency |
|---|---|
| Interest payments | Monthly (or reserved) |
| Draw inspections | Per draw |
| Builder's risk insurance | Annual premium |
| Property taxes | As incurred |
Construction Budget
What Lenders Want to See
A detailed, realistic budget with:
Hard Costs (60-70% of total)
- Site work and excavation
- Foundation
- Framing and lumber
- Roofing
- Windows and doors
- Plumbing, electrical, HVAC
- Interior finishes
- Landscaping
Soft Costs (15-25% of total)
- Architectural and engineering
- Permits and fees
- Surveys and inspections
- Legal and accounting
- Marketing (spec homes)
Financing Costs (10-15% of total)
- Loan origination
- Interest reserve
- Closing costs
- Insurance
Contingency (10-15% minimum)
- Unexpected costs
- Change orders
- Delays
Guarantees & Recourse
Personal Guarantee
Most construction loans require:
- Full personal guarantee
- Joint and several (all partners liable)
- Financial covenants (maintain liquidity)
Completion Guarantee
Your promise to:
- Finish the project per plans
- Fund any cost overruns
- Maintain property during construction
Release Conditions
Guarantees may release upon:
- Certificate of Occupancy
- Debt service coverage achieved
- Sale or refinance
Common Issues & Solutions
Problem: Cost Overruns
Prevention:
- Detailed budget with 15%+ contingency
- Fixed-price GC contract
- Thorough permit review upfront
Solution if it happens:
- Request loan modification
- Contribute additional equity
- Value-engineer remaining scope
Problem: Timeline Delays
Prevention:
- Realistic schedule with weather buffer
- Strong GC with proven track record
- Order long-lead items early
Solution if it happens:
- Request loan extension (1-3% fee typical)
- Accelerate construction (add crews)
- Communicate proactively with lender
Problem: Market Shifts
Prevention:
- Conservative sale price assumptions
- Know your cost basis
- Have backup exit (rent if can't sell)
Solution if it happens:
- Extend and carry
- Reduce price to market
- Convert to rental
Get Construction Financing
MoneyMatcher connects you with 50+ construction lenders in seconds.
What You'll Need to Submit
✅ Project summary and location
✅ Construction budget
✅ Architectural plans
✅ Builder experience/resume
✅ Exit strategy
What You'll Get
- 10 construction loan quotes
- Comparison of terms and rates
- Dedicated loan coordinator
- Fast closing (14-21 days)
Get Construction Loan Quotes →