Understanding Ground-Up Construction Loans
Ground-up construction loans provide financing for investors, builders, and developers constructing new residential properties from the ground up. These programs may help fund land acquisition, site preparation, materials, labor, professional services, and other approved construction expenses.
Unlike a traditional purchase loan, construction financing is typically released in stages rather than as one lump sum. Funds may be advanced through a draw schedule after specific phases of the project have been completed, inspected, and approved.
Construction financing may be considered for
- Single-family homes
- Residential investment properties
- Small subdivisions
- Townhomes
- Two-to-four-unit properties
- Build-to-rent projects
- Speculative residential construction
- Infill development
- Major redevelopment involving new construction
Repayment and Exit Strategy
The review process may include an evaluation of the land value, plans and specifications, permits, construction budget, contractor qualifications, borrower experience, project timeline, contingency reserves, projected completed value, and proposed exit strategy.
Important Program Considerations
Borrowers should have a detailed and realistic construction plan. Cost overruns, permitting delays, contractor issues, and changes in market conditions can affect the success of a project, making adequate reserves and project management especially important.
Repayment and Exit Strategy
The exit strategy may involve selling the completed property, refinancing into permanent financing, or retaining the property as an income-producing investment.
Information to Prepare
To request a preliminary evaluation, provide the land purchase price or current value, construction budget, completed property value, plans and permit status, requested financing, borrower or builder experience, anticipated completion date, and proposed repayment strategy.