A ground-up construction loan pays for building a new property from the foundation up. Unlike a purchase loan, you do not receive all of the money at closing. Funds are held and released in stages as the work is completed. Here is how the process generally runs.
1. The plan and budget
Lenders want to see what you are building and what it will cost. Expect to provide plans, a detailed construction budget (often called a scope of work or cost breakdown), a timeline, and information about your builder or general contractor.
2. Closing and the first funds
At closing, the loan typically funds the land purchase (if you are buying it) and sets up the construction account. You will usually have some of your own money in the project, since lenders generally do not fund 100% of costs.
3. Building and draws
As each phase is completed, you request a draw. The lender verifies progress, often with an inspection, and releases the money for that phase to you or your contractors. Interest is generally charged only on the amount drawn so far, which keeps early payments low.
| Typical phase | What gets completed |
|---|---|
| Site work & foundation | Clearing, utilities, footings and slab |
| Framing & shell | Structure, roof, windows and doors |
| Systems & interior | Mechanical, electrical, plumbing, drywall |
| Finishes & completion | Cabinets, flooring, fixtures, final inspection |
4. The exit
A construction loan is short term. When the build is finished, you repay it by selling the property or refinancing into long-term financing, such as a DSCR rental loan if you are keeping it as a rental. Decide on your exit before you start, and build in time for delays.
What can go wrong
- Budget overruns. Materials and labor can cost more than planned. A contingency in your budget helps.
- Delays. Permits, weather and inspections can push the timeline, which adds interest and holding costs.
- Appraisal surprises. The finished value should support your exit. Check comparable sales for new construction early.
Talk to us early
The earlier a lender sees your plan, the fewer surprises later. Get a quote to see where a construction loan could land for your project.