Ground-Up Construction Loans: How Investors Finance New Builds

A ground-up construction loan finances building a new property from the land up, instead of buying and renovating an existing one. Because the building does not exist yet, these loans work differently from a normal mortgage. The money is released in stages as the work is completed, and the lender pays close attention to the budget, the plans, and the builder.

How the funds are released

Ground-up loans are financed by a draw schedule. Instead of receiving the full amount at closing, the borrower requests funds as each phase of construction is completed. A typical schedule might follow milestones such as foundation, framing, rough-ins, and finishes. After each phase, an inspector or the lender verifies progress, and the next draw is released.

This protects both sides. The lender is sure the money goes into the building, and the borrower has a clear structure for paying the contractor. It also means the project needs a detailed budget and a well-organized timeline from the start.

What lenders usually want to see

• Plans and permits, or a clear path to getting them
• A detailed budget, with costs for each phase and a line for contingencies
• The land, including whether the borrower already owns it and how much equity that represents
• The builder, including licenses, insurance, and a track record with similar projects
• The borrower's experience and credit, and the cash the borrower is putting into the project
• An exit plan, such as selling the finished property or refinancing into a long-term loan

Costs and terms

Construction loans carry higher rates than long-term mortgages because construction has more risk and the term is short. Our ground-up construction rates start as low as 8.99% for qualifying borrowers, and the rate depends on the project, the borrower, and the market. Ask about origination fees, inspection fees for each draw, interest reserve, and extension fees.

Some construction loans include an interest reserve, where part of the loan is set aside to pay interest while the building is under way. Others require the borrower to pay interest monthly. Ask which structure applies so your cash flow is clear.

Common mistakes to avoid

• Underestimating the budget. Material and labor costs move, and change orders add up. A contingency of at least several percent is common practice.
• Ignoring the timeline. Permits, weather, and inspections can add weeks. Every extra month means more interest.
• Choosing a builder on price alone. An unreliable contractor can delay the project and risk the loan.
• Skipping the exit plan. Decide whether you will sell or refinance, and check that the finished value supports it.

Selling versus holding

If you plan to sell, your profit depends on the finished value, the sale costs, and how quickly you sell. If you plan to hold, a long-term loan such as a DSCR loan can replace the construction loan once the property is complete and rented, and this is a common "build, rent, refinance" strategy.

What to have ready

1. Plans, permits, or the permit timeline
2. A line-item budget and construction schedule
3. The builder's license, insurance, and references
4. Proof of land ownership or the purchase contract
5. Proof of funds for the down payment, fees, and reserves

Rates, terms, and approval depend on the borrower, the project, and the lender. This guide is educational and is not a commitment to lend.