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Ground-up construction loans finance the purchase of land and the construction of a new building from scratch. The lender funds the lot acquisition and holds the construction budget in a draw account, releasing funds in stages as construction milestones are completed and inspected. These are the most complex hard money loans and the most underwriter-intensive. Borrower experience and contractor credibility matter more here than in any other loan type.
Ground-up construction loans look similar to fix and flip loans in structure — acquisition plus holdback — but the scale and complexity are different.
Land/lot acquisition: The lender funds the purchase of the land at closing. Some lenders will fund a portion of land value; others require the borrower to already own the lot free and clear.
Construction holdback: The total construction budget is held in a draw account and released in stages as the build progresses. Common milestone draws include:
Each draw requires an inspection — by the lender's inspector or a third-party draw management company — to verify milestone completion before funds are released.
Loan term: Construction loans typically run 12-24 months depending on project scale. Extensions are common on large or complex builds.
Construction underwriting is more detailed than fix and flip underwriting. The lender is financing something that does not exist yet, based on plans, budgets, and a team's ability to execute.
The completed value (as-completed appraisal): An appraiser reviews the plans, specifications, and comparable new construction sales to determine what the finished property will be worth. The loan is sized against this projected value.
Total project cost: Purchase price of the land plus total construction budget plus soft costs (permits, architecture, engineering, financing costs). Lenders typically fund a percentage of total project cost — 75-85% is common, with limits relative to the completed value.
Plans and permits: Are architectural drawings and permits in order? Construction cannot start without them, and lenders want to see them before committing capital.
Construction budget: Is the budget realistic and itemized by trade? A vague "construction costs — $500,000" does not underwrite. Lenders want to see line items by division: site work, foundation, framing, roofing, mechanical, electrical, plumbing, finishes.
General contractor: Who is building this? The contractor's license, insurance, bond, and experience matter enormously. A lender is not going to fund a $1.2M construction project for a borrower using an unlicensed contractor with no track record.
Borrower experience: Ground-up construction lenders want to see prior construction experience. A borrower who has never managed a build before will face a significantly smaller universe of willing lenders — and those lenders will require more equity and more oversight.
Fix and flip deals have a hard asset with existing structure. If something goes wrong, there is something to sell. Ground-up construction has no building until it is built. The lender's security interest is a lot and a set of plans until construction is substantially complete.
That risk profile makes ground-up lenders much more selective about who they fund. They want borrowers who have built before. They want contractors with completed projects they can verify. They want budgets from someone who has actually priced out construction — not guesses.
If your borrower is a first-time builder, ground-up lending is difficult but not impossible. The path is: more equity, a proven general contractor, a well-established lender relationship, and realistic numbers.
Ground-up construction loans run through the Certificate of Occupancy (C of O) — the official document from the city or county certifying the building is complete and safe to occupy. The C of O is what triggers the final draw, closes out the construction loan, and enables the borrower to either sell or refinance into permanent financing.
Delays in getting the C of O — common when inspections find issues or when municipalities have long queues — extend the loan term and accrue additional interest. Build a buffer into your borrower's timeline.
Construction loans are temporary. The borrower needs a plan for what happens after completion:
Sell: The finished property is sold, the construction loan is paid off from proceeds. Works for spec builders.
Refinance to permanent financing: The completed property qualifies for a conventional mortgage or DSCR loan, which pays off the construction loan. Works for long-term holders and landlords.
Convert: Some construction lenders offer one-time-close programs that convert the construction loan into a permanent loan at completion. Less common in the hard money space.
Underwriting wants to see that the exit strategy is credible at the time of origination. A borrower who says "I'll figure it out when it's done" is not a borrower who has thought this through.
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