Ground-Up Construction Financing
Ground-up construction financing is designed to help finance eligible real-estate development projects from the early stages of construction through completion. Unlike a traditional mortgage on a completed property, construction financing is generally structured around the project budget, construction timeline, borrower or developer qualifications, collateral, and an approved draw schedule.
Loan Definition
What Is a Ground-Up Construction Loan?
A ground-up construction loan may provide financing for the development of a new property beginning with vacant land, a development site, or a property being substantially redeveloped. Depending on the transaction and lender, financing may potentially include certain costs associated with:
- Land acquisition
- Site preparation
- Construction
- Labor
- Materials
- Approved soft costs
- Professional fees
- Interest reserves
- Other approved project costs
Eligible costs and loan structures vary by lender and project.
Project Types
Types of Projects
"Property eligibility varies by lender, location, project size, zoning, experience, and financing program."
The Process
How Construction Financing Works
Construction financing is generally different from financing an already completed property. The process below reflects a common framework — lenders may follow different procedures.
01
Project Review
Lender evaluates the project scope, location, type, and feasibility.
02
Financial & Developer Review
Borrower or sponsor qualifications, experience, and financial strength are assessed.
03
Plans, Budget & Documentation
Architectural plans, construction budget, and supporting documents are submitted.
04
Underwriting
Lender completes its credit, collateral, and project analysis.
05
Closing
Loan documents are executed and the loan is funded per the approved structure.
06
Construction Draws
Funds are released in stages as construction milestones are completed.
07
Inspections / Progress Verification
Lender may require inspections or documentation before releasing each draw.
08
Project Completion
Construction is completed and the project is ready for its next phase.
09
Exit or Permanent Financing
The construction loan is repaid through sale, refinance, or permanent financing.
Project Fundamentals
Budget, Draws, Experience, Plans & Land
Budget
Construction Budget
Lenders generally review a detailed construction budget. Potential categories may include:
- Land
- Site work
- Foundation
- Structural work
- Electrical
- Plumbing
- HVAC
- Roofing
- Interior construction
- Exterior work
- Landscaping
- Professional fees
- Permits
- Contingency reserves
- Other eligible project expenses
Lenders may require a detailed sources-and-uses statement.
Draw Schedule
How Construction Draws Work
Construction loan proceeds are often released in stages rather than provided entirely at closing. Funds may be released through an approved draw schedule as construction milestones are completed. Lenders may require:
- Draw requests
- Inspections
- Contractor invoices
- Proof of completed work
- Updated construction budgets
- Lien waivers
- Other documentation
Not all lenders use identical draw procedures.
Developer Experience
Borrower / Developer Experience
Lenders may consider the experience of the borrower, sponsor, builder, or developer. Potential considerations may include:
- Previous completed projects
- Similar construction experience
- Development history
- Contractor experience
- Property-management experience
- Financial strength
- Project team
- Track record
"Developer experience requirements vary significantly by lender and project."
Plans & Entitlements
Plans, Zoning & Entitlements
Construction lenders may evaluate the project's readiness to build. Potential documentation may include:
- Architectural plans
- Engineering plans
- Survey
- Zoning information
- Building approvals
- Permits
- Environmental reports
- Site plans
- Development approvals
- Other municipal documentation
"Projects that are not fully entitled or permitted may require a different financing strategy."
Land
Land
Construction projects may involve:
- Land already owned by the borrower
- Recently purchased land
- Land being acquired simultaneously with the construction loan
Existing land equity may potentially be considered as part of the overall transaction depending on lender guidelines.
Land equity does not guarantee satisfaction of required borrower equity.
General Contractor
General Contractor
Lenders may evaluate the general contractor. Potential items may include:
- Contractor experience
- Licensing where applicable
- Insurance
- Project history
- Construction contract
- Cost estimates
- Timeline
- References
- Financial capacity
Lender requirements vary.
Financing Structure
LTC, LTV, Equity, Contingency & Interest Reserve
Leverage Measurements
Loan-to-Cost and Loan-to-Value
Loan-to-Cost (LTC)
Compares the loan amount with eligible total project costs.
Loan-to-Value (LTV)
Compares the loan amount with the applicable property value.
Construction lenders may evaluate one or both measurements. No universal maximum LTC or LTV is published here.
Borrower Equity
Borrower Equity
Most construction transactions require some form of borrower or sponsor equity. The amount and acceptable source of equity can depend on:
- Project cost
- Land value
- Property value
- Developer experience
- Loan size
- Project type
- Lender requirements
- Market conditions
No universal down-payment percentage is advertised here.
Contingency
Construction Contingency
Construction budgets may include contingency reserves intended to address certain unexpected project costs. The required contingency, if any, depends on the lender, project, budget, and construction risk.
Interest Reserve
Interest Reserve
Some construction financing structures may include an interest reserve designed to help cover eligible loan interest during a portion of the construction period.
Availability and calculation vary by lender. Not all construction loans include an interest reserve.
Valuation & Exit
Appraisal, Timeline, Exit Strategy & Construction-to-Permanent
Appraisal
Appraisal and Completed Value
Construction lenders may obtain an appraisal that evaluates the project based on approved plans, specifications, market information, and other factors. The appraisal may include an estimated value upon completion.
"An estimated completed value is not a guarantee of future market value."
Timeline
Construction Timeline
Lenders evaluate the expected construction period. Potential considerations include:
- Start date
- Construction milestones
- Draw schedule
- Completion date
- Permit status
- Contractor availability
- Material availability
- Potential delays
Completion timelines are not guaranteed.
Exit Strategy
What Happens When Construction Is Complete?
Lenders generally want to understand how the construction loan will ultimately be repaid. Potential exit strategies may include:
- Sale of the completed property
- Permanent mortgage financing
- Multifamily permanent financing
- Commercial permanent financing
- Investor refinance
- Portfolio financing
- Other approved repayment strategies
"The appropriate exit strategy depends on the project and financing structure."
Construction-to-Permanent
Construction-to-Permanent Financing
Certain projects may qualify for construction-to-permanent financing, where construction financing transitions into longer-term financing after completion, subject to program requirements.
Learn About Construction-to-Permanent FinancingDocumentation
Documents That May Be Requested
Getting Started
Questions We May Ask
Prosper Path Group
Financing Built Around the Project
Construction financing is not one-size-fits-all. Prosper Path Group works to understand the property, development plan, budget, experience, timeline, and exit strategy so we can help identify financing options that may fit the transaction.
Ready to Begin?
Ready to Discuss Your Construction Project?
Tell us about your project, construction budget, financing request, and timeline. Prosper Path Group can help you explore potential construction-financing options based on the details of the transaction.
Construction financing programs, terms, rates, loan amounts, leverage, equity requirements, draw procedures, property eligibility, developer requirements, and underwriting standards vary by lender and transaction. Construction financing is subject to credit approval, collateral review, project feasibility, property evaluation, borrower or sponsor qualifications, lender guidelines, and other applicable requirements. Not all borrowers or projects will qualify. This information is provided for general educational purposes and is not a commitment to lend.
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