New Construction Loans

A new construction loan funds a build from the ground up. Unlike a purchase loan, the majority of the money is not advanced at closing. It is committed against a line item budget and released in draws as each stage of construction is completed and verified.

How construction financing is structured

Most ground up facilities have two components. The first covers the land or lot acquisition. The second is the construction budget, which sits in a holdback and is released across a draw schedule tied to the build.

1. Land or lot funding advances at closing
2. You complete a defined construction stage such as foundation or framing
3. You submit a draw request with an updated budget and supporting documentation
4. An inspection verifies the completed stage
5. Funds release for that stage and the cycle repeats

The two things that sink construction deals

The first is an unrealistic budget. If your line items do not reflect current subcontractor pricing in your market, you will run short somewhere around framing and the shortfall comes out of your own capital. Build a contingency of at least ten percent and treat it as spent.

The second is the gap between draw cycles. You fund each stage before you are reimbursed, so your working capital requirement is not the down payment, it is the down payment plus the largest single stage you will carry. Builders who model only the equity injection run out of cash mid project.

Planning the exit before you break ground

Construction loans mature while the market is doing whatever it is going to do. Decide now whether the exit is a sale or a refinance into a thirty year rental loan. If it is a refinance, run the projected rent against the projected payment today so you know the coverage ratio works before you commit two years to the build.

Frequently asked questions