Complete Builder Financing Guide
From lot acquisition to certificate of occupancy - here's how to finance every stage of your project.
The Builder's Capital Stack
Most construction projects use a combination of financing sources:
┌─────────────────────────────────────────┐
│ Developer Equity (15-25%) │ ← Your skin in the game
├─────────────────────────────────────────┤
│ Mezzanine/Preferred (10-20%) │ ← Higher cost, flexible
├─────────────────────────────────────────┤
│ Senior Debt (60-75%) │ ← Construction loan
└─────────────────────────────────────────┘
Stage 1: Land Acquisition
Financing Options
| Option | LTV | Rate | Best For |
|---|---|---|---|
| Cash | 100% | None | Maximize leverage later |
| Land Loan | 50-65% | 10-14% | When cash is limited |
| Seller Financing | Negotiable | 6-10% | Motivated sellers |
| Cross-Collateral | 70%+ | Varies | Existing portfolio leverage |
Pro Tips for Land Acquisition
- Tie up the deal with option, not purchase - gives time to entitle
- Get survey and environmental early - surprises kill deals
- Know your exit - can you sell the land if project doesn't proceed?
Stage 2: Entitlement & Pre-Development
What You Need Before Construction Financing
✅ Approved site plan
✅ Building permits (or clear path)
✅ Architectural plans
✅ Engineering completed
✅ Environmental clearance
✅ Builder GC contract
Financing During Entitlement
Most lenders won't fund until permits are in hand. Options:
- Self-fund with equity
- Bridge loan on land (expensive)
- Partner with equity investor
- Presell lots/units to fund entitlement
Stage 3: Construction Financing
Construction Loan Basics
| Term | Definition |
|---|---|
| LTC | Loan-to-Cost - loan ÷ total project cost |
| LTV | Loan-to-Value - loan ÷ completed value |
| Draw Schedule | When you can access loan funds |
| Interest Reserve | Pre-funded interest built into loan |
| Completion Guarantee | Your promise to finish on budget |
Typical Construction Loan Terms
| Feature | Spec Home | Custom Home | Multifamily |
|---|---|---|---|
| LTC | 75-85% | 80-90% | 70-80% |
| LTV | 70-75% | 75-80% | 65-75% |
| Term | 12-18 mo | 12 mo | 18-36 mo |
| Rate | 10-13% | 8-12% | 9-12% |
| Points | 1.5-3 | 1-2 | 1-2.5 |
The Draw Process
1. Complete milestone (e.g., foundation)
↓
2. Request draw from lender
↓
3. Inspector verifies work
↓
4. Lender releases funds (2-5 days)
↓
5. Pay subs/suppliers
↓
6. Repeat for next milestone
Common Draw Schedule
| Draw | Milestone | % of Loan |
|---|---|---|
| 1 | Land payoff + permits | 25% |
| 2 | Foundation complete | 15% |
| 3 | Framing complete | 20% |
| 4 | Dried in (roof, windows) | 15% |
| 5 | MEP rough-in | 10% |
| 6 | Drywall + finishes | 10% |
| 7 | Final/CO | 5% |
Stage 4: Permanent Financing / Exit
Exit Options
| Exit | Timeline | Best When |
|---|---|---|
| Sell | Before or at CO | Spec builds, hot market |
| Rent + Refi | 3-6 mo after CO | Build-to-rent strategy |
| Hold on Construction | Extend term | Waiting for market |
| Portfolio Loan | At CO | Multiple units, scale |
Construction-to-Perm Loans
One loan for construction + permanent:
- Pros: One closing, locked perm rate, simpler
- Cons: Must commit to perm terms upfront, less flexibility
Qualifying as a Builder
What Lenders Look For
| Factor | Weight | What They Want |
|---|---|---|
| Experience | 30% | Similar projects completed |
| Liquidity | 25% | Cash reserves for overruns |
| Net Worth | 20% | Backstop for guarantees |
| Project Quality | 15% | Good market, realistic budget |
| Credit | 10% | 680+ typically required |
Building Your Track Record
First Project:
- Partner with experienced builder
- Use GC with strong resume
- Start small (single lot, not subdivision)
- Document everything
Scaling Up:
- Keep detailed project files
- Get lender references
- Build relationship with 2-3 lenders
- Maintain clean credit and liquidity
Budget & Pro Forma Tips
The Lender's Underwriting Checklist
✓ Hard costs (materials, labor)
✓ Soft costs (permits, design, legal)
✓ Contingency (10-15% minimum)
✓ Interest reserve
✓ Points and fees
✓ Carrying costs (taxes, insurance)
✓ Marketing/sales costs
✓ Developer fee
Common Budget Mistakes
❌ Underestimating soft costs - Plan 20-25% of hard costs
❌ No contingency - 10% minimum, 15% for first project
❌ Ignoring carry time - Budget 6+ months past expected completion
❌ Aggressive sale price - Use conservative comps
Risk Mitigation
Protect Your Project
| Risk | Mitigation |
|---|---|
| Cost overrun | Contingency + fixed-price GC contract |
| Delays | Realistic timeline + weather buffer |
| Market shift | Conservative exit assumptions |
| Subcontractor failure | Vet subs + payment/performance bonds |
| Interest rate risk | Interest reserve + rate cap |
Insurance Requirements
- Builder's Risk (during construction)
- General Liability
- Workers Comp (via GC)
- Title Insurance
- Errors & Omissions (optional)
MoneyMatcher for Builders
What We Offer
- 10 construction loan quotes - Compare lenders instantly
- Draw management - Track and request draws
- Project dashboard - Monitor all active builds
- Lender relationships - 50+ construction lenders
- Fast turnaround - Most approvals in 7-10 days