How it works
The land is either already owned and contributed as equity, or purchased with the first draw. Construction funds release in stages against an approved budget and schedule, verified by inspection. Interest is IO on the drawn balance only, so carrying costs start small and grow as the build progresses.
Land costs $200,000, construction budget is $600,000 and expected completed value is $1,000,000. A construction lender will analyze cost basis, completed value, borrower/GC experience, plans and permits — not simply the future appraisal.
Who it can work well for
Builders and developers with a track record, and investors doing spec construction. Land already carrying ENTITLE moves dramatically faster than raw dirt.
What lenders actually look at
Expect review of land ownership/basis, plans, permits, budget, contingency, builder/GC, experience, LTC/LTV, completed value, draw schedule, reserves, interest carry and exit strategy.
Illustrative lender guidelines
These are educational examples, not universal approval rules. Exact requirements and maximum leverage vary by lender and complete scenario.
| Scenario | Credit / qualifier | Illustrative leverage |
|---|---|---|
| Experienced builder, 3+ builds | 700+ | 75% LTC / 65% ARV |
| Some experience | 680+ | 70% LTC / 65% ARV |
| First ground-up | 700+ | 65% LTC / 60% ARV |
| Term | — | 12-24 months |
| Land equity | — | Counts toward cost |
What to watch for
Lenders want prior ground-up experience specifically — completed flips do not always count. First-time builders face much tighter leverage or need an experienced general contractor on the file.
Common misconception: a high completed appraisal guarantees the construction loan. Lenders also cap exposure to actual cost and require a credible project team and budget.
When this may not be the best choice
Investor ground-up financing may not fit someone building a primary residence, a project without sufficient plans/approvals, or a borrower without the liquidity to handle draws and overruns.
Common questions
Related programs
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