Construction lending is bridge lending with a longer horizon and more moving parts. Miss a draw milestone or C/O date and interest carry can eat your entire profit.
The loan structure
Two flavors:
1. Land + vertical (one loan). Close on the land + construction budget together. Lender funds the land at close, then releases vertical funds in draws.
2. Land loan → construction loan (two closings). Buy the land with a short land loan, then refinance into a construction loan when permits are ready.
Typical terms:
- Up to 75–85% LTC.
- Cap of 65–70% LTV of ARV.
- 12–24 month term, interest-only on drawn balance.
- 2–3 points, rate 10–12%.
- Personal guarantee required.
The draw schedule
A pre-agreed disbursement calendar tied to inspection milestones. Sample for a spec SFR:
| Draw | Milestone | % of budget |
|---|---|---|
| 1 | Foundation poured | 15% |
| 2 | Framing + roof | 25% |
| 3 | MEP rough-in | 20% |
| 4 | Drywall + insulation | 15% |
| 5 | Finishes + trim | 15% |
| 6 | Final + C/O | 10% |
Each draw requires: contractor invoices, lien waivers, and a lender inspection ($200–450). Funding hits your account in 3–7 business days.
Where deals die
- Permit delays. 3–6 month delays are common in some jurisdictions. Underwrite them.
- Weather. Framing paused = interest still accruing.
- Change orders. Every "while we're at it" costs money and pushes timeline.
- Subs no-showing. Have backup contractors.
- Appraisal drops. If comps soften during your build, your take-out refi is smaller.
The take-out
Construction loans do not stay in place. Two exits:
- Sell — pay off the construction loan at closing.
- Refi to permanent — DSCR (rental) or conventional (owner-occ).
Lock the take-out 60–90 days before C/O. Missing the take-out window forces you to extend the construction loan (extension fees ~1 point, higher rate).
Working capital
You need cash to bridge draws. Rule of thumb: 10–15% of the construction budget in liquid reserves to cover between-draw expenses.
Watch-outs
- Non-refundable earnest money on land is common. Do zoning/utility due diligence before going non-refundable.
- Utility hookups can run $10k–$100k+. Get quotes early.
- Contractor bonds and lien releases protect you at every draw.