Construction Finance

Instead of receiving the full loan amount upfront, construction loans disburse funds in 'draws' as your project reaches specific milestones. You submit a draw request with supporting documentation (invoices, completion inspections), the lender verifies progress, and releases funds. During construction, you typically pay interest only on the funds drawn not the full loan amount. This keeps payments manageable while the project is being built.

A construction-to-permanent (C-to-P) loan starts as a construction loan that converts automatically to a permanent mortgage once the project is complete. You go through one underwriting process and one closing. During construction, you pay interest only. Upon completion, it converts to a standard amortizing loan. This is convenient and can save on closing costs compared to getting two separate loans.

Most construction lenders finance 65–85% of the total project cost (land + construction costs), requiring you to contribute 15–35% as equity. Lenders also look at the loan-to-value (LTV) ratio based on the completed project's projected value typically lending no more than 70–75% of the 'as-completed' appraised value.

Construction lenders require detailed project plans and specifications, a project budget with contractor bids, construction timeline, building permits, an 'as-completed' appraisal, your financial statements and tax returns, and a resume of your construction/development experience. First-time developers may face additional requirements or need a more experienced general contractor to strengthen the application.

Cost overruns are common in construction. Most lenders require a contingency reserve (typically 5–10% of project costs) built into the loan budget to cover unexpected costs. If overruns exceed the reserve, you'll need to fund the difference personally lenders generally won't increase the loan amount mid-project. This is why accurate budgeting and a qualified general contractor are essential before applying.