Construction Loans

The Complete Guide to Ground-Up Construction Loans | Lender Tribune

A ground-up construction loan is a short-term, specialized commercial financing tool designed to fund the building of a new property from scratch on vacant or teardown land. Unlike traditional mortgages that finance existing, turn-key structures, construction loans provide capital in staged “draws” to cover everything from land acquisition and soft costs (permits, architectural plans) to the hard costs of vertical construction.

At Lender Tribune, we break down the mechanics of construction financing so developers and real estate investors can get their projects shovel-ready and funded without the bureaucratic delays of traditional banking.

Private Construction Loans vs. Traditional Bank Loans

If you attempt to finance a $2 million multifamily development through a traditional bank, expect a 60- to 90-day underwriting process heavily focused on your personal tax returns and Debt-to-Income (DTI) ratio. Private lenders and debt funds, however, focus primarily on the viability of the project itself.

Feature	Private/Alternative Construction Loan	Traditional Bank Construction Loan
Primary Underwriting Focus	Builder experience & project ARV	Borrower’s personal W-2 income & credit
Funding Speed	10 to 21 days	45 to 90 days
Typical Term Length	12 to 24 months	12 to 18 months (often converts to permanent)
Loan-to-Cost (LTC) Limits	Up to 85% – 90%	Typically capped at 70% – 75%
Interest Rates (Current Market)	9.00% to 12.00%+	7.00% to 9.00%

Core Underwriting Metrics: LTC and LTARV

To secure a ground-up loan, you must understand how lenders calculate your maximum borrowing power. They use two strict ceilings, and your loan amount will be capped by whichever number is lower.

1. Loan-to-Cost (LTC)

LTC measures the loan amount against the total cost to build the project (Land Purchase Price + Hard Construction Costs + Soft Costs).

• The Standard: Most private lenders offer up to 85% LTC, requiring the developer to bring 15% in cash equity to the table. If you already own the land free and clear, the value of that land can often serve as your entire equity contribution, allowing the lender to fund 100% of the actual construction costs.

2. Loan-to-After-Repair Value (LTARV)

LTARV (sometimes just called LTV or ARV) measures the loan amount against the appraised value of the property after it is fully built.

• The Standard: Lenders want a protective equity cushion in case the market drops during the 12-month build. They will typically cap your max loan at 70% to 75% of the completed value.

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The Construction Draw Process

Ground-up construction loans are not handed to you as a lump sum at closing. Because the lender’s collateral (the physical building) doesn’t exist yet, they mitigate risk by releasing funds in stages as the value of the property increases.

1. The Initial Advance: At closing, the lender funds the land acquisition (or reimburses you for a portion of it) and may release a small initial advance for immediate soft costs or site clearing.
2. Construction Holdback: The remainder of the loan is held in escrow by the lender.
3. Reaching Milestones: As your General Contractor (GC) completes a phase of work (e.g., pouring the foundation, completing rough framing), you submit a “Draw Request.”
4. Third-Party Inspection: The lender sends an independent inspector to the site to verify that the specified work has been completed up to code.
5. Funds Released: Once verified, the lender wires the draw amount to your account (or directly to the GC) so you can pay for the labor and materials and move on to the next phase.

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How Interest Is Charged: “As-Disbursed” vs. “Full Boat”

A massive advantage of ground-up construction loans is how the interest payments are structured.

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For most large construction loans, lenders charge interest “As-Disbursed” (sometimes called interest on the drawn balance). This means you only pay interest on the money that has actually been released to you, not the total loan commitment.

Example of As-Disbursed Interest: You are approved for a $1,000,000 loan at a 10% annual interest rate.

• Month 1: You have only drawn $200,000 to buy the lot and pour the foundation. Your monthly interest payment is calculated only on that $200,000.
• Calculation: (200,000 × 0.10) / 12 = $1,666 per month.
• Month 6: You have now drawn $800,000 as the house is framed and roofed. Your monthly payment increases to reflect the new drawn balance.
• Calculation: (800,000 × 0.10) / 12 = $6,666 per month.

Warning: Smaller loans (typically under $100,000) or certain hard money products may charge “Full Boat” interest, meaning you pay interest on the entire $1,000,000 from day one, even if you’ve only drawn $200,000. Always check your term sheet for “as-disbursed” language.

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What Lenders Require for Approval

If you want to secure ground-up financing, you must bring a complete, professional package to the underwriter. A standard loan package requires:

• Shovel-Ready Status: Most lenders will not close a loan until the land is fully entitled and you have approved building permits from the city.
• Developer Experience: Ground-up construction is high-risk. Lenders usually require the borrowing entity to have completed at least 3 to 5 successful ground-up or heavy rehab projects in the last 36 months. (If you lack experience, you must partner with a highly experienced, licensed General Contractor).
• Detailed Project Budget: A line-item breakdown of all hard costs, soft costs, and a 10% to 15% contingency reserve for budget overruns.
• Liquidity: You must show enough liquid cash in your bank accounts to cover the down payment, closing costs, and 6 to 12 months of interest reserves.

Frequently Asked Questions (FAQ) About Ground-Up Construction Loans