Ground-up construction financing for real estate investors. How draw structures work, LTC limits, qualification requirements, and conversion to permanent financing.
A construction loan finances ground-up real estate development with funds released in draws as work is completed and inspected. Typical terms: 12-24 months at 9-12% interest, with 75-85% loan-to-cost (LTC) for experienced builders and 70-80% for first-timers. Construction loans are interest-only during the build phase, with interest calculated on the drawn balance rather than the full loan amount. Funds typically release across 5-7 stages tied to construction milestones: foundation, framing, mechanical rough-in, drywall, finishes, and final certificate of occupancy. At completion, the loan either auto-converts to permanent financing (construction-to-perm) or requires a separate take-out refinance into a DSCR or commercial permanent loan.
Construction loans are fundamentally different from purchase or refinance loans:
Construction loans use Loan-to-Cost (LTC), not Loan-to-Value (LTV):
LTC matters because the property doesn't have value during construction — it has cost. Once complete, lenders evaluate the as-completed appraisal and convert to LTV-based permanent financing.
Typical construction LTC: 75-85% for experienced builders, 70-80% for first-time investors. SBA-backed construction can go to 90% LTC for owner-occupied commercial.
| Loan Type | Use Case | Typical Terms |
|---|---|---|
| Single-Family Ground-Up | Spec build or build-to-rent | 12-18 months, 80-85% LTC, 9-11% |
| Multifamily Construction | 5+ unit ground-up | 18-24 months, 75-80% LTC, 9-11% |
| Commercial Construction | Retail, office, industrial | 18-30 months, 70-80% LTC, 9-12% |
| Construction-to-Perm | One-time close, auto-converts | 12-24 months construction + 30-year perm |
| SBA 504 Construction | Owner-occupied commercial | Up to 90% LTC, government-backed |
| Owner-Builder | Borrower is the GC | Specialty programs, 65-75% LTC |
Construction draws follow a typical 5-7 stage schedule:
Each draw takes 7-14 days from request to funding. Plan for working capital between draws.
Construction loans aren't designed to be held long-term. You have two paths at completion:
For investment property (not owner-occupied), the typical exit is a DSCR loan or commercial permanent loan based on the property's rental income and stabilized value.
Most institutional construction lenders require a licensed general contractor. Owner-builder programs (where you act as your own GC) exist but with stricter requirements:
Through LendingStreet's marketplace, we place owner-builder construction across specialty capital sources offering these programs.
Standard construction loans require 15-25% borrower equity (75-85% LTC). For first-time builders, expect 20-30% equity required.
No — but you typically need to use a licensed general contractor. Owner-builder programs allow you to be your own GC but require prior construction experience and more equity.
Single-family: 6-12 months typical. Multifamily: 12-24 months. Commercial: 18-36 months. Plan for some delays — most projects run 15-25% over original schedule.
Yes — land you already own counts toward your equity contribution. If land has appreciated significantly, your effective LTC drops, often qualifying you for better terms.
Most construction loans don't increase mid-project. Overruns come from cash reserves. Always budget 10-15% contingency outside the loan.
Construction loans are almost always recourse — personal guarantee required from principals.
For substantial renovation that approaches new construction, yes — but a fix-and-flip loan with renovation funds is usually more appropriate.