Ground-Up Construction Loans: Draw Financing for New Builds

What is a business-purpose construction loan?

A ground-up construction loan finances the building of a new structure, from land and plans to a finished building. Because the collateral is being created during the loan, the money is released in draws as the project reaches milestones and each draw is verified by an inspection. See the construction draw loan guide for the mechanics.

Construction loans are short-term by nature. The loan ends when the project is finished and either sold or refinanced into permanent financing.

What does the construction lender underwrite?

• The land value and how it was acquired.
• A detailed construction budget with hard and soft costs.
• Plans, permits and a contractor with a track record.
• The projected value of the finished building.
• The exit plan: sale of the finished building or a permanent-loan refinance.

How does the draw process work?

Construction draws are tied to physical milestones such as foundation, framing, rough-in, drywall and final. Before each draw, an inspector confirms the completed work, and the lender releases funds for that stage. A retainage is often held until the project is finished and final inspections pass.

The paperwork is detailed: a line-item budget, contractor invoices, lien waivers and inspection reports. Keeping the budget and the scope in writing, and documenting changes, keeps the draws moving.

Should you sell or refinance the finished building?

The two exits from a construction loan are selling the finished building or keeping it as a rental. If you keep it, you refinance the construction loan into a long-term DSCR loan once the building is finished and leased. If holding is the plan, compare expected rent with the full proposed refinance payment using the DSCR exit guide before you break ground.

Because construction carries cost overrun and schedule risk, the exit has to be planned before the first draw, not discovered at the end.

How can a broker help compare your options?

Construction lenders differ in the projects they favor and how they structure draws. Hard Money Loan is a Loan Daddy LLC brand, and Loan Daddy LLC is a mortgage broker, not a lender. We arrange and shop construction financing from wholesale lenders and plan the sale or refinance exit with you. Send the land, the plans and the budget through the application.