What Is It?
Construction financing provides capital to build a project. Rather than receiving the full amount at closing, funds are typically disbursed in draws as construction milestones are completed. The structure may be construction-only or construction-to-permanent, where the loan converts to longer-term financing once the project is finished and stabilized. Because the collateral is being created, lenders evaluate the project's budget, timeline, borrower or developer experience, and exit strategy closely.
When It May Make Sense
- Ground-up commercial, multifamily, or residential investment construction
- A project with a realistic budget, timeline, and exit strategy
- Developers or borrowers with relevant construction experience
- Projects where the completed value is expected to support permanent financing
When It May Not Make Sense
- Underfunded projects with insufficient equity or contingency
- Unclear budgets, timelines, or exit strategies
- Borrowers without relevant experience and qualified team members
- Projects dependent on assumptions that haven't been validated
What Lenders Typically Evaluate
- Construction budget and draw schedule
- Project timeline and milestones
- Loan-to-cost (LTC) and loan-to-value (LTV)
- Borrower or developer experience
- Equity contribution and contingency reserve
- Permits, approvals, and entitlements
- Contractor qualifications and plans
- Exit strategy: sell, refinance, or stabilize and hold
Potential Benefits
- Fund a project that creates value greater than its cost
- Draw structure aligns funding with construction progress
- Construction-to-permanent options can reduce a second closing
- Can support ground-up, expansion, or renovation projects
Risks & Considerations
- Cost overruns and delays can require additional equity
- Interest accrues on drawn funds during construction
- Exit strategy must be realistic — refinancing depends on completed value and qualification
- Market or permitting changes can affect the project timeline
What to Prepare
Common items lenders may request — requirements vary by program and lender.
- Project pro forma: budget, timeline, and expected completed value
- Construction plans, specs, and contractor bids
- Evidence of permits, entitlements, and approvals
- Borrower / developer experience summary
- Source of equity and contingency funds
- Exit strategy documentation
Frequently Asked Questions
A draw schedule ties the release of loan funds to completed construction milestones — for example, foundation, framing, and completion. The lender or a third party typically inspects the work before each draw is released, so funding aligns with verified progress.
LTC is the loan amount expressed as a percentage of the total project cost (land, hard costs, soft costs, and contingency). A 75% LTC means the lender funds up to 75% of total cost and the borrower contributes the remaining 25% as equity.
A construction-to-permanent loan begins as a construction loan and, once the project is completed and meets requirements, converts into longer-term permanent financing — potentially avoiding a separate second closing.
Explore Your Options
Submit your information and our team will review which available capital structures may be appropriate for your business or project.
Financing is subject to underwriting, eligibility, and approval. Products, terms, and availability vary by program and lender. Submitting information does not guarantee approval or funding. This page is educational and is not financial, legal, tax, or investment advice.