Ground-up construction financing provides capital to build a new structure on vacant land or on a lot where an existing structure has been demolished. Unlike renovation loans that fund repairs to an existing building, ground-up construction loans fund the entire construction cycle from land acquisition through certificate of occupancy. These loans require specialized underwriting that accounts for construction risk, project timelines, and developer experience.
Construction loans are not advanced all at once at closing. Instead, the total loan amount is disbursed in draws tied to construction milestones. A typical draw schedule might include: (1) Initial draw at closing for land costs and pre-construction fees; (2) Foundation complete; (3) Framing complete; (4) Rough MEP (mechanical, electrical, plumbing) complete; (5) Drywall and insulation complete; (6) Finish work; (7) Final draw at certificate of occupancy. Each draw requires an inspection by a lender-approved inspector who verifies the milestone is complete before funds are released.
Because construction loans don't produce income during the build, borrowers aren't required to make monthly interest payments from their own pocket during construction. Instead, lenders typically include an interest reserve in the loan budget — a pre-funded account held by the lender that automatically covers interest payments as they accrue. This keeps the borrower's capital free during construction and simplifies cash flow management. The interest reserve is calculated based on the projected loan balance growth, construction timeline, and interest rate.
Ground-up construction lenders evaluate: (1) Developer experience — number of projects completed, scope, and location; (2) General contractor qualifications and track record; (3) Project feasibility — is the ARV supported by market comps?; (4) Construction budget — is it realistic and complete?; (5) Borrower financial strength — liquidity, net worth, and ability to complete the project if the loan reaches term. First-time developers may qualify with a strong GC, experienced equity partner, or by selecting a more straightforward project type (e.g., single-family vs. multi-unit).
Ground-up construction loans are short-term — typically 12 to 24 months. At project completion, borrowers have two primary exit options: sell the completed property (common for spec builders) or refinance into permanent financing (common for investors who want to hold). If holding, the exit is typically a DSCR loan for a single-family rental or a multifamily bridge loan for larger projects awaiting lease-up stabilization.
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