New Construction Loans for Builders & Investors

A new construction loan (also called a ground-up construction loan) finances building a property from the dirt up — land, materials, and labor — for investors and builders who plan to sell or rent the finished home. Unlike a rehab loan that improves an existing structure, a construction loan funds an entire build, which means a more structured draw process, a focus on your budget and plans, and a clear exit at completion. This guide explains how these loans work end to end.

What a construction loan funds

A ground-up loan typically covers a blend of:

• Land / lot acquisition (or you may already own the lot, contributing it as equity).
• Hard costs — materials and labor to build the structure.
• Soft costs — permits, architectural plans, engineering, and fees (varies by lender).

As with other investor financing, it's asset-based and business-purpose — underwritten on the project and your exit rather than your personal income, and closed through an entity.

How leverage works: loan-to-cost and loan-to-ARV

Construction lenders use two caps, and your loan is constrained by both:

1. Loan-to-cost (LTC). A percentage of the total project cost (land + hard + soft costs). Lenders commonly fund a high share of cost — often up to ~85–90% for experienced builders — meaning you bring 10–15% of the budget plus any lot equity.
2. Loan-to-ARV (or loan-to-value-complete). A percentage of the finished appraised value, typically capped around ~65–75% of ARV. This keeps the loan safely below what the completed property will be worth.

A worked example

Lot:            $60,000
Hard + soft:    $240,000
Total cost:     $300,000
Value complete (ARV): $450,000

LTC cap (85%):       0.85 × 300,000 = $255,000
LTV-complete (70%):  0.70 × 450,000 = $315,000

Loan = lower of the two = $255,000
Your cash/equity in = 300,000 − 255,000 = $45,000

Here the LTC cap governs. The healthier your spread between cost and finished value, the more comfortably the deal fits inside both caps.

The draw process is the heart of a construction loan

Construction loans fund through a draw schedule tied to standard building milestones — more structured than a rehab loan's draws. A typical sequence:

Draw	Milestone
1	Foundation / slab
2	Framing
3	Dry-in (roof, windows, exterior)
4	Rough mechanicals (plumbing, electrical, HVAC)
5	Drywall & interior
6	Finishes & final / certificate of occupancy

At each milestone you request a draw, the lender (or a third-party inspector) verifies completion, and funds release — usually within a few business days. As with rehab loans, draws are reimbursements: you typically fund or complete a phase first, so you need working capital to keep the job moving between draws. Many lenders charge interest only on drawn funds. See understanding draw schedules.

Interest reserves

Because a build produces no income during construction, many construction loans include an interest reserve — the lender sets aside part of the loan to cover your monthly interest payments through the build. This preserves your cash while you have no rent or sale proceeds coming in, at the cost of borrowing slightly more. It's especially valuable on longer builds.

What lenders evaluate

Ground-up lending puts more weight on execution risk than a simple purchase, so lenders look closely at:

• Your budget. A detailed, line-itemed construction budget — lenders scrutinize this heavily.
• Plans and permits. Approved plans, and permits in hand or clearly attainable.
• The builder / GC. A licensed, experienced general contractor (or your own track record if you self-build). First-time builders face more scrutiny and lower leverage.
• The lot. Clear title, proper zoning, and utility access.
• The ARV. A supportable finished value from conservative comps.
• The exit. A credible plan to sell or refinance at completion.

Experience matters more here than on most investor loans — a builder with completed projects earns better leverage and pricing.

Timelines

Ground-up construction loans run longer than rehab loans because building takes longer. Terms commonly run 12 to 24 months, interest-only, with a balloon at completion. Build a realistic timeline with a buffer — construction delays (weather, permits, supply chain, inspections) are the norm, not the exception, and running past your term means extension fees.

The exit

Like all short-term investor financing, a construction loan ends in a balloon, so plan the exit before you break ground:

• Sell the completed property (the build-to-sell model) at the projected value.
• Refinance into a DSCR loan if you'll hold and rent (the build-to-rent model) — the finished, leased property qualifies on its cash flow.

Confirm the takeout up front. If you'll rent, model the DSCR on the finished property in our DSCR calculator so you know the refinance will clear the floor.

Common pitfalls

• Underestimating cost. Build a contingency (often 10%+) into the budget; overruns eat your equity and can exceed the loan.
• Optimistic timeline. Delays are routine; budget interest and carrying costs for longer than your best case.
• Vague plans or budget. Lenders can't underwrite what they can't verify — come with detailed plans and a line-itemed budget.
• No confirmed exit. Know whether you're selling or refinancing, and that the numbers work, before you start.
• Inexperienced GC. A weak contractor is the biggest execution risk; lenders price it accordingly.

Bottom line

A new construction loan funds a ground-up build to the lower of a loan-to-cost and a loan-to-ARV cap, releasing money through a milestone-based draw schedule, often with an interest reserve to carry you through the no-income build period. Lenders weigh your budget, plans, builder, and exit heavily. Come prepared with detailed plans, a padded budget, and a confirmed takeout. Ready to build? Get a quote with your lot, budget, and finished-value numbers.

This guide is general information for builders and investors, not financial or legal advice. Construction lending terms, leverage, and requirements vary significantly by lender, market, and project.