A construction loan funds a build in stages, releasing money through draws as the work progresses. You pay it off at the end with a sale or a refinance into permanent financing. It’s a fundamentally different animal from a loan on an existing building. After all, there’s no income and no finished asset yet. In short, construction financing backs a plan, not a finished asset.
Money released in draws
Unlike a normal loan that funds all at once, a construction loan disburses in stages called draws. As you complete each phase — foundation, framing, and so on — an inspector verifies the work. Then the lender releases the next tranche of funds. You typically pay interest only on what you have drawn. As a result, carrying costs stay down early in the build.
The exit is built in from day one
A construction loan is short-term by design, so the exit matters as much as the build. There are two: sell the finished project, or refinance into permanent financing. For a rental, that means finishing the build and signing leases that produce income. Above all, the lender wants to see that exit clearly before funding a single draw.
What the lender underwrites
- Plans and permits. In other words, approved, buildable, and ready.
- A detailed budget. That is, line-item costs, with contingency.
- A qualified builder. Namely, a general contractor who can actually deliver.
- The land. Either you own it, or its acquisition cost folds into the deal.
- The exit. Finally, a credible sale or refinance at completion.
Because there’s no existing income, the plan and the people carry the underwriting.
What you’ll bring
Construction lending asks for real equity, often a meaningful share of the total project cost. In addition, expect reserves and, frequently, relevant building experience or a strong contractor. Therefore, the equity and the pricing reflect the higher risk of a from-scratch project.
A typical deal
A scenario I see often: an investor building a small rental project on land they control. Then we fund the land and the build through scheduled draws, interest-only during construction. In addition, the file carries a clear refinance exit for completion. Once the investor finishes and leases the project, the property refinances into permanent financing, which pays off the construction loan.
Planning a build?
The plan, the budget, and the exit tell us whether it pencils. Tell us about your deal and we’ll map it — in English or Spanish.
By Andres Jara — Alpha Equity Lending (NMLS #1855083). 20+ years in real estate finance, an MS in Finance, and an active South Florida investor and landlord.
