Loan-to-cost and loan-to-value
Lenders size construction loans two ways. Loan-to-cost (LTC) compares the loan to the total project budget: land, hard costs, soft costs, fees and interest. Loan-to-value (LTV) compares it to the appraised value once the project is finished. Most construction loans land between 60% and 85% LTC, depending on property type, sponsor experience and pre-leasing.
Your equity goes in first
Lenders expect your cash or land equity to be spent before their funds start flowing. If your land has risen in value since you bought it, some lenders will credit part of that increase toward your equity.
How draws work
- You or your contractor submit a draw request with invoices and lien waivers.
- The lender's inspector visits the site to confirm the work is done.
- The lender releases funds for the completed work, minus any retainage.
- You pay interest only on the amount drawn so far.
Monthly draws are common. Building the draw schedule to match your contractor's billing avoids cash crunches.
Interest reserves
Most construction loans include an interest reserve: part of the loan set aside to pay interest during construction, while the property has no income. It's built into the budget, so plan for it from day one.
Contingency
Lenders want a hard-cost contingency, often 5% to 10%, to cover overruns. A thin contingency is one of the most common reasons construction budgets get pushed back.
Plan your exit before you break ground
A construction loan typically lasts 12 to 36 months. Before it matures you'll need to sell or refinance into permanent debt. Lenders will ask how you get there, so show the stabilized income, the target DSCR and who the likely permanent lenders are. Some lenders offer construction-to-permanent loans that convert automatically.
Next step
See our construction loan options, or send us your project for written terms within 48 hours.