Ground-up construction financing basics

Construction financing looks intimidating, but it comes down to three moving parts: how the money is released, how leverage is measured, and how the loan gets paid off. Here is the plain-English version.

How construction money is released

Unlike a purchase loan that funds in a lump sum, a construction loan releases money in draws tied to milestones — commonly foundation, framing, mechanicals, drywall, and final. You draw as you build, and you pay interest only on the funds actually deployed. This keeps carrying costs down during the early stages when nothing is generating income.

Two ways leverage is measured

Construction lenders describe leverage against both cost and value:

• Loan-to-cost (LTC) — the loan against land plus hard and soft construction costs; often up to ~80–85%, sometimes 100% of vertical construction if you bring the land
• Loan-to-completed-value (LTV/ARV) — the total loan against the finished appraised value; commonly capped near 65–70%

The three things that get a deal funded

Construction lenders consistently weigh the same trio: a realistic, line-item budget; a licensed general contractor with a track record; and a defensible completed value backed by comparable sales. Bring those three and the deal is fundable — even for a newer builder with more equity in the deal.

Plan the exit before you break ground

A construction loan is short-term — usually 12 to 24 months — so the exit must be clear from day one. Either sell at completion or refinance into a DSCR or permanent loan. Lenders want to see that take-out before they fund the build, so line it up early.

Frequently asked questions