Whether you’re a custom builder, a spec developer, or an investor building your first ground-up project, understanding how construction financing works will save you time, stress, and money.
This article breaks down how new construction loans are structured, how draws are managed, and how to transition seamlessly into long-term financing once your project is complete.
How Construction Loans Are Structured
Unlike a traditional purchase mortgage where the full loan amount funds at closing, a construction loan is released in stages — called draws — tied to construction milestones. This keeps the lender’s exposure proportional to the work completed and ensures funds are actually being put into the property.
The Typical Draw Schedule
Most residential construction loans include 4–6 draws. A common structure looks like this:
- Draw 1 — Foundation (10–15% of total budget)
- Draw 2 — Framing & rough-in (20–25%)
- Draw 3 — Mechanical, electrical, plumbing (15–20%)
- Draw 4 — Drywall & interior (15–20%)
- Draw 5 — Final finishes & occupancy (15–20%)
Before each draw is released, a third-party inspector visits the site to verify the work is complete. This protects both you and the lender — and gives you a built-in quality check at every phase.
Interest-Only During the Build
Most construction loans are interest-only during the construction period — and you only pay interest on the funds that have actually been drawn. So in month one, when only the foundation draw has been released, your monthly payment is significantly lower than the projected payment on the full loan amount. This frees up cash flow during the most expensive phase of the project.
Bridge-to-Permanent Financing
One of the smartest moves for builder-investors is to set up a bridge-to-permanent structure from day one. Here’s how it works: your construction loan is pre-approved to roll into a long-term DSCR or commercial loan once construction is complete. No second application, no second underwriting, no second closing costs — just a smooth transition from construction to stabilized financing.
What You’ll Need to Qualify
- Detailed construction budget and scope of work
- Architectural plans and permits (or permits in process)
- General contractor information and resume
- Land owned or under purchase contract
- As-completed appraisal
- Builder’s risk insurance binder
- Liquid reserves for contingency
Plan for the Unexpected
Even the best-managed projects encounter delays or cost overruns. Build in a 10–15% contingency in your budget and confirm with your lender that the contingency funds are part of the loan — not something you’ll have to come up with out of pocket.
Ready to build? Learn more about our New Construction loans or apply now to get started.
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