Ground-Up construction loans

The lender does not fund the entire construction budget upfront. Instead, funds are released in stages as work progresses. After each milestone (foundation, framing, rough mechanicals, etc.), the borrower requests a draw, the lender sends an inspector, and the next tranche of funds is released.

This protects both the lender and the borrower by ensuring funds are only deployed as value is being created.

Lenders underwrite the project as much as the borrower. A strong budget, experienced builder, and realistic timeline all improve the chances of approval and favorable terms.

Most ground-up borrowers either sell the completed property or refinance into a long-term loan (like DSCR) if the property will be held as a rental. Having a clear exit plan before starting construction is important because the loan term is finite and the lender will want to see a realistic path to repayment.

Construction loans are sized on the full project cost: land, hard costs (materials and labor), and soft costs (plans, permits, engineering, insurance, and interest during the build). The lender funds a share of that total, quoted as loan-to-cost, and you cover the rest. Most lenders also cap the loan against the appraised as-completed value, which is what the finished property is expected to be worth.

The appraisal for a ground-up loan is done from the plans and specifications, using sales of comparable new or recently built properties. If the as-completed value comes in lower than expected, the loan shrinks and the equity you need grows, so it pays to check local new-construction sales before you commit to a budget.

If you already own the lot, its value can often count toward your share of the project. A lender will typically credit either what you paid for the land or its current appraised value, depending on how long you have owned it. Land that is owned free and clear can cover a large part of the required equity, which lowers the cash you need to bring to closing.

If there is still a loan on the land, the construction loan usually pays it off at closing so the construction lender holds first position.

A house under construction produces no income, so many construction loans include an interest reserve: money set aside in the loan to cover interest payments until the project is finished. The reserve is part of the loan amount, which means you are borrowing to pay the interest, but it keeps your monthly cash outlay low while you build.

Interest is normally charged only on the funds drawn so far. Early in the project, when only the land and foundation are funded, payments are small. They rise as each draw is released.

Each draw is checked before it is paid. The lender's inspector visits the site to confirm the work matches the request, and most lenders ask for lien waivers from the contractor and major subcontractors showing they have been paid for earlier work. This protects the property from liens that could block a sale or refinance.

Draw delays are one of the most common causes of construction slowdowns. Submitting complete requests, keeping invoices organized, and lining up inspections before crews run out of funded work keeps the schedule on track.

Ground-up loans are used for a range of investor projects. The type of build affects the appraisal, the term, and the exit.

For build-to-rent projects, the exit is a refinance into long-term debt once the property is finished, has its certificate of occupancy, and is leased. A DSCR loan is a common choice because it is qualified on the property's rent instead of your personal income. Lining up that refinance before the build starts, and building a few months of buffer into the construction term for lease-up, avoids paying construction-loan rates longer than necessary.

Relip is a direct lender that works 100% wholesale. Brokers bring ground-up projects to Relip, price them in the Relip Loan Pricer, and run the term sheet, appraisal, credit and title from one platform. The borrower remains the broker's client through completion and the refinance or sale that follows. We never compete with the broker.