The Investor's Guide to Ground-Up Construction Loans

If you're a real estate investor looking to maximize returns on new construction projects, a ground-up construction loan is one of the most powerful financing tools in your arsenal. Unlike conventional construction financing designed for homeowners, these loans are structured specifically for experienced investors who understand the risks and rewards of building from the ground up.

At Lendoor, we've funded hundreds of ground-up construction projects across the country—from multi-family developments in urban cores to luxury spec homes in suburban markets. Here's what you actually need to know before applying.

What Is a Ground-Up Construction Loan?

A ground-up construction loan is a short-term financing vehicle—typically 12 to 24 months—used to fund the development of a new property from an empty lot or cleared site to a completed structure. Unlike a mortgage, which finances the purchase of an existing building, a ground-up loan funds the process of creating one.

These loans are structured as draw facilities: you don't receive a lump sum at closing. Instead, the lender releases funds in stages as construction milestones are completed and verified by a third-party inspector.

How Ground-Up Construction Loans Work

The basic mechanics work like this: The lender approves a total loan amount based on the projected cost of the build and the after-construction value (ACV) of the finished property. At closing, you receive an initial draw to begin site work. As construction progresses—foundation poured, framing complete, rough-ins done, finishes installed—you submit draw requests supported by inspection reports. The lender releases additional funds at each verified milestone.

During construction, you pay interest only on the drawn balance, not the full loan amount. This significantly reduces your carrying cost during the build phase.

Ground-Up vs. Renovation Loans: The Key Difference

Fix-and-flip loans and ground-up construction loans are both short-term, draw-based products—but they're not the same thing. Fix-and-flip loans finance the acquisition and renovation of existing structures. Ground-up loans finance new development on vacant or cleared land. Lenders treat these differently because ground-up projects carry more risk: there's no existing structure as collateral during the early phases, construction timelines are longer, and the number of variables is higher.

Loan Structure and Terms

Ground-up construction loans from private lenders like Lendoor typically have the following structure:

• Loan Term: 12 to 24 months
• Interest Rate: 9%–12% (interest-only during construction)
• Origination Fee: 1.5–3 points
• Loan-to-Cost (LTC): Up to 85–90% of total project cost
• Loan-to-After-Construction-Value (LTACV): Typically capped at 65–70%
• Minimum Loan Amount: $150,000
• Maximum Loan Amount: $5,000,000+

What Lenders Evaluate

Private construction lenders evaluate deals differently than banks. The primary factors:

Experience

Have you completed similar projects before? Lenders want to see a track record—ideally two or more comparable completed projects. First-time builders may still qualify, but typically need stronger equity positions and a highly experienced general contractor.

General Contractor Quality

Your GC is a critical underwriting variable. Lenders want a licensed, insured contractor with verifiable completed projects in the same property type and price range. Weak GCs can kill an otherwise strong deal.

Construction Budget

The budget must be detailed, realistic, and independently validated. Line-item budgets covering all hard costs, soft costs, permits, and contingency reserves (typically 10%) are standard. Underbid budgets are a red flag.

Market and Exit Strategy

What happens when construction is complete? Are you selling (spec) or refinancing into permanent financing (build-to-rent)? Lenders need a credible exit. For spec projects, they'll evaluate comparable sales to validate projected sale price. For build-to-rent, they'll evaluate rental income relative to a DSCR refinance.

Equity / Down Payment

Most private lenders require 10–25% of total project cost as a borrower equity contribution. This can come from cash, land equity, or a combination. Land you own free and clear can count toward your required equity if the lender accepts it.

The Draw Process in Practice

Once your loan closes, draws work on a request-and-inspect cycle:

1. You submit a draw request with supporting documentation (invoices, lien waivers, photos)
2. The lender orders a third-party inspection to verify work is complete and materials are on-site
3. The inspector submits a report confirming completion percentage
4. The lender releases funds—typically within 3–5 business days of inspection approval

Managing your draw schedule tightly is critical. Delays in requesting draws slow your project; requesting draws before work is truly complete creates inspection failures that further delay funding.

Soft Costs and What's Fundable

Many investors don't realize that private construction loans can fund more than just lumber and labor. Eligible costs typically include:

• Land acquisition (if purchased simultaneously)
• Hard construction costs (materials and labor)
• Soft costs (architecture, engineering, permits)
• Contingency reserve
• Interest reserve (funded at close to cover payments during construction)

What's typically not fundable: the borrower's profit, marketing costs, or costs already incurred before the loan closes.

Ground-Up Construction Loan Requirements at Lendoor

At Lendoor, our ground-up construction loan program generally requires:

• Minimum credit score: 660+
• Entity borrowing (LLC or similar)
• Verifiable real estate experience preferred
• Licensed, insured general contractor
• Detailed construction budget and timeline
• Independent appraisal of after-construction value
• Title insurance

We lend on single-family, multi-family (2–30 units), and mixed-use projects in 45+ states. Minimum loan size is $150,000.

Exit Strategy: Sale vs. Refinance

Your exit from a ground-up construction loan matters as much as your entry. The two standard exits:

Sale: You build and sell. The construction loan is paid off at closing from sale proceeds. This is the standard exit for spec builders and flippers working at scale.

Refinance: You build and hold. Once construction is complete and the property is stabilized (occupied and generating rental income), you refinance into long-term financing—typically a DSCR loan if you're a real estate investor. This is the standard exit for build-to-rent investors.

Common Mistakes to Avoid

The biggest pitfalls in ground-up construction financing:

• Underfunding contingency: Build projects almost always encounter surprises. Underbidding contingency leaves you short mid-project.
• Weak GC selection: A GC who can't manage a draw schedule or who underestimates costs can derail your entire project.
• Misjudging timeline: Permitting, inspections, and supply chains routinely add weeks or months. Build buffer into your loan term.
• Ignoring soft cost funding: Permits, architecture, and engineering can add 5–10% to your total cost. These need to be in the budget from day one.

Is a Ground-Up Construction Loan Right for You?

If you're developing new construction for sale or for a buy-and-hold portfolio, a ground-up construction loan from a private lender is almost certainly the right tool. Bank construction loans are available, but they're slower, more restrictive on eligible properties and borrower profiles, and often won't lend on speculative projects or to entity borrowers without significant documentation.

Private construction lending is built for investors. The underwriting focuses on the deal, not your W-2.

Ready to fund your next ground-up project? Submit your deal at lendoor.com and get a term sheet within 24 hours. Lendoor lends in 45+ states on ground-up construction projects from $150K to $5M+.

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Lendoor LLC | NMLS #1997062 | 727 S Hartford St, Unit 220, Chandler, AZ 85225 | This content is for informational purposes only and does not constitute a commitment to lend. All loans subject to underwriting approval.