A ground-up construction loan finances a building that does not exist yet. Because the collateral is still being built, the construction portion of the loan is released in stages, called draws, as work is completed and documented under the loan's conditions, rather than handed over as one lump sum at closing. This article covers ground-up financing for business-purpose investment property.
This article focuses on the mechanics between closing and completion rather than the rate. Each draw can carry conditions, and each condition is a place where money can wait. Below: what gets reviewed before closing, how a draw moves from request to disbursement, how budget changes are handled, and which unresolved conditions can hold funding.
What a Ground-Up Construction Loan Is, and How It Differs From a Rehab Loan
A ground-up construction loan funds new vertical construction, either on land the borrower already owns or on land acquired as part of the transaction. Loan to cost is a ratio used when a loan pays for work that has not happened yet.
A note on sources. Several mechanics in this article are illustrated with publicly filed construction loan agreements. Those are institutional facilities for larger projects, not loans on one-to-four unit investor properties. They show how one set of documents handles a mechanism, not what every lender requires; your own loan documents control.
Two pieces are worth separating. Some loan documents allow part of the proceeds to be used at or near closing, for example toward the land purchase or other approved budget items. The construction portion is different. It is disbursed later, in draws, against a budget and a set of conditions. One published agreement we reviewed limits draw requests to work actually completed and materials incorporated into the project or stored on the property. Stored materials are not completed work, and whether they can be funded at all, and on what terms, is a question for the specific documents.
A rehab loan on an existing house can use a similar holdback, but the starting point is different. With a renovation, there is already a structure with an as-is value. With ground-up work, the building being financed does not exist yet. The fix and flip loan guide covers renovation holdbacks and how cost and completed-value ceilings size a flip; that math is not repeated here.
A ground-up appraisal estimates what the property will be worth once the planned work is finished, which is what a subject-to-completion conclusion describes.
Where This Structure May Fit, and Where It May Not
Ground-up financing can fit an investor who plans to build and sell, or build and hold. If a hold plan relies on refinancing into a rental loan, that takeout is a separate transaction with its own requirements; the DSCR loan guide explains how that kind of loan is evaluated.
The structure may fit when:
- Plans and specifications are complete enough for a contractor to price them line by line.
- Required permits are issued, or the path to issuance is clear and documented.
- The budget ties to a signed construction contract, with a contingency line.
- The investor has cash beyond the required contribution to cover overruns and timing gaps.
The structure may fit poorly when the plans are still changing, when permits depend on approvals that have not been granted, when the budget is an estimate rather than a bid, or when the only exit works at one sale price on one date. None of this is an eligibility statement. Whether a project can be financed is decided by a lender's credit policy applied to the complete file.
What Is Reviewed Before the First Draw
Before construction money moves, the file needs to describe one project consistently across its documents. A lender's review can cover the pieces below, and a loan officer's job is to get them to agree before underwriting sees them.
Plans, permits, and scope. A lender can ask for the plans the contractor priced, evidence of permits, and a line-item scope of work that matches both. A budget that says one thing and a permit set that says another can produce questions before closing.
The contractor. The construction contract and the general contractor behind it are part of the review. Expect questions about licensing where required, insurance, and the contractor's track record.
Title and survey. A title commitment identifies what must be cleared before the lender's policy can issue. In one agreement we reviewed, the list of project documents required before closing included a survey of the land.
The borrower's contribution. In one published agreement, the borrower had to put in a defined amount of its own equity, and the lender was not required to make any advance until that equity was fully injected. That is a contractual sequence in that document, not a universal rule. Establish with the specific lender what counts toward the contribution, for example cash at closing, land already owned, or project costs already paid, whether each is accepted, and when it must be in place.
How a Construction Draw Works, Step by Step
A construction draw is a disbursement of part of the construction budget. A draw request is the application for one; the disbursement follows only if the lender's conditions are met.
Three separate things sit behind the phrase construction draw schedule. The first is the budget. In one agreement we reviewed, requests were tied to the budget and limited to work completed and materials incorporated into the project or stored on the property. On the contractor side, the G703 continuation sheet breaks the contract sum into portions of the work under a schedule of values the contractor prepares. That is the contractor's billing breakdown, not the lender's draw schedule. The second is timing: the same agreement specified how often requests could be made and the advance notice the lender would ordinarily require. The third is the disbursement itself, which happens only after the applicable conditions are satisfied. A draw schedule organizes requests. It does not set guaranteed payment dates.
The mechanics are set by the loan documents, and the order below is a way to organize the work, not a fixed contractual sequence. Several of these conditions can be reconciled at the same time, and in the agreement we reviewed, inspection was one condition among several rather than a trigger for payment.
Where the construction contract calls for it, the contractor submits a payment application. The American Institute of Architects publishes a form for this, AIA Document G702, Application and Certificate for Payment, used with the G703 continuation sheet. Under that form, the contractor applies for payment and, where an architect is involved, the architect's signature certifies to the owner that the amount shown is due. The form also shows retainage, if any.
That certification runs between contractor, architect, and owner. It does not obligate a lender to fund. The lender makes its own disbursement decision under the loan agreement. One agreement we reviewed allows the lender to require a written draw request on forms it reasonably requests, naming a standard AIA payment form as an example.
Then the lender reconciles its conditions. In that same agreement, conditions to each disbursement included:
- Fees then due have been paid.
- Work claimed at that stage was completed in a good and workmanlike manner, in material compliance with the plans and specifications.
- Executed receipts and lien waivers from parties with potential lien rights, as the lender reasonably required.
- A title bringdown, with an endorsement to the lender's title policy, or a satisfactory commitment to issue one, confirming the lender's lien remained ahead of liens for work performed or materials delivered.
Inspection sits alongside those conditions. A draw inspection checks that the work claimed is actually in place. In the agreement we reviewed, inspections were for the lender's own protection, not the borrower's, and a disbursement did not mean the lender had approved the quality of the work.
| Part of the draw | Who acts | Document or evidence | What it does not do |
|---|---|---|---|
| Payment application | Contractor | Pay application, such as G702 with G703 | Does not obligate the lender to fund |
| Certification | Architect, where the contract uses one | Architect's signature on the application | Certifies to the owner, not to the lender |
| Draw request | Borrower | Lender's request form and backup | Does not guarantee the requested amount |
| Site verification | Lender's inspector or agent | Inspection of completed work and stored materials | Does not approve workmanship for the borrower |
| Lien and title review | Title company and lender | Lien waivers, receipts, title bringdown, endorsement | Does not replace the lender's other conditions |
| Disbursement decision | Lender | Loan agreement conditions, retainage terms | Is not an acceptance of the work |
Loan documents can also provide for retainage, a holdback from payments. The retainage question below covers how one agreement handled holding and releasing it.
Illustrative example. A framing-stage draw request arrives with the contractor's pay application. The inspector confirms framing is in place, but windows claimed as stored on site are not there, and one subcontractor's lien waiver is missing. Depending on its documents, the lender can fund the verified framing, hold the window line, or wait for the waiver. This example is illustrative, not a real borrower file.
Budget, Contingency, Change Orders, and Keeping the Loan in Balance
In the agreement we reviewed, loan proceeds were to be used for project costs in accordance with the budget, so changes to the budget have consequences.
Cost overruns. In one published agreement, the borrower was responsible for paying all cost overruns as they occurred, with the option to use documented line-item savings or contingency to cover them.
Keeping the loan in balance. The same agreement let the lender require a deposit of the borrower's own funds if it determined that the undisbursed loan amount was not enough to finish and pay for the project, unless the borrower could show available savings or contingency to cover the gap. Under terms like these, an overrun can require cash before the next draw moves.
Change orders. A change order modifies the approved scope or budget. The agreement we reviewed required advance written lender approval for change orders, with limited exceptions for smaller changes that did not materially alter the design or structure and, where governmental approval was required, had been approved. Read your own exception terms closely.
Contingency. Contingency is a line in the budget, not free money. The agreement we reviewed set rules for when and how contingency could be reallocated as construction progressed. If your documents restrict contingency use, a surprise that seems covered on paper may still need approval.
Reserves and cash beyond the required contribution are what a borrower can use when an overrun, a held draw, or a pending change order needs funding.
Where Funding Gets Delayed
Funding can wait when a condition in the documents is not yet satisfied. The stages below map where those conditions sit, so the file can be prepared before the request goes in.
| Stage | Unresolved condition that can hold funding | What to prepare before asking |
|---|---|---|
| Before closing | Plans, permits, budget, and contract do not describe the same project; title or survey items open | One consistent document set; title commitment exceptions reviewed early |
| Borrower contribution | Required equity not yet in place, or not in the form the lender accepts | Written confirmation of what counts and when it is due |
| Construction draws | Required inspection, lien waivers, receipts, or title bringdown for the requested work not yet complete | Contractor and subcontractors briefed on the draw package and waiver requirements |
| Mid-project | Overrun leaves the loan out of balance; change order not yet approved; stored materials not verifiable | Updated budget, change order approvals in writing, delivery records for stored items |
| Final draw | Governmental inspections, occupancy approval, completion certification, or final title endorsement outstanding | Inspection sign-offs tracked early; closeout documents requested from the contractor |
Checking these conditions before a request is filed shows what could hold it.
Planning a ground-up build and want a second read on the draw conditions before you sign? Talk to the Desk. Fifteen minutes with a licensed loan officer, before the documents are final.
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Completion, Certificate of Occupancy, and the Exit
In the agreement we reviewed, the lender had no obligation to make the final disbursement until:
- Construction was completed to the lender's reasonable satisfaction, in material accordance with the plans and specifications.
- The contractor had fully performed.
- Any required completion notice had been posted.
- The lender had received appropriate title endorsements.
That agreement did not treat construction as complete until the lender received evidence that governmental inspections had been approved and a certificate of occupancy had been issued. It also required a certification from an engineer, architect, or other qualified inspector, a final as-built survey, and evidence that the parties who worked on the project had been or would be paid.
Your documents may list different closeout items. Ask for the list at closing, not at the end of the build.
For the two plans discussed here, completion leads to the exit. In a build-to-sell plan, the loan is repaid from sale proceeds. In a hold plan that relies on refinancing, the takeout loan brings its own underwriting and conditions; the Clear to Close guide explains how a file can stay conditional even after the major questions look resolved.
Construction-Specific Cost Lines to Ask About
Construction financing can involve cost lines tied to the build itself. Ask how each is handled in your documents rather than assuming:
- Inspection charges. Whether site inspections are billed, and how.
- Interest on the balance. Whether interest accrues on the full commitment or only on funds actually disbursed.
- Undrawn commitment charges. One published construction facility charged a fee on the unused portion of the loan amount. Ask whether your loan carries anything similar.
- Updated appraisals. Whether the lender can require them during the project, and who pays.
- Title endorsements. Whether each draw's title update and endorsement carries a charge.
The hard money cost stack covers the full lifecycle of loan costs.
Questions Investors Ask About Ground-Up Construction Loans
What is a ground-up construction loan?
It is financing for new vertical construction. Because the building does not exist yet, the construction portion is released in draws against work and materials documented under the loan's conditions, and the appraisal looks at value after completion. Any funds available at closing, such as land costs, depend on the loan documents.
Do I need 20% down for a construction loan?
The question alone does not establish the required contribution for a specific file, and this article does not publish a percentage. The answer comes from the lender's sizing and equity terms for that project, including what it accepts toward the contribution. Confirm with the lender whether cash, land already owned, or costs already paid count. In at least one published agreement, the equity had to be in place before the lender advanced loan funds.
How do construction loan draws work?
The contractor documents completed work and any stored materials claimed, the borrower submits a draw request, and the lender reconciles its conditions, which can include a site inspection, lien waivers, a title update, and retainage terms. If the conditions are satisfied, the lender disburses under the terms of its documents. A contractor's certified pay application does not by itself obligate the lender to fund.
How often can I request a draw?
The loan documents set that. One published agreement specified how often draw requests could be made and the advance notice the lender would ordinarily require before a disbursement. Ask for the frequency and notice terms before closing so the contractor's billing cycle matches.
Can I get a ground-up construction loan with no experience?
That depends on the specific lender and program, and this article cannot answer it for any particular file. What to establish with the lender: how it evaluates the borrower's own construction or investment history, what role the general contractor plays, and whether that program accepts a contractor's experience in place of the borrower's. Do not assume a contractor automatically substitutes for borrower experience.
What happens if a construction project goes over budget?
Under at least one published agreement, overruns were the borrower's responsibility as they occurred, and the lender could require a deposit of borrower funds if the remaining loan amount would not cover completion, unless documented savings or contingency covered the gap.
What is retainage on a construction loan?
Retainage is a portion of a payment that is held back until later. In one published agreement, the lender could withhold the retainage amount specified in the construction contract and could release it before completion at its discretion. When and how retainage is released depends on your documents and on the conditions being satisfied.
What happens at the final draw?
It closes out the project against a completion list. The section on completion above lists what one agreement required, including a certificate of occupancy and evidence that the parties who did the work had been or would be fully paid.
Bring the plans, the budget, and the draft draw terms to a licensed loan officer and ask where funding could wait. Talk to the Desk.
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Editorial Scope
The Lending Desk publishes educational information about business-purpose real estate financing for investment property. This article is not a quote, an offer, an approval, or an eligibility determination. The contractual examples describe how specific publicly filed agreements handled particular mechanisms; they are institutional facilities, not one-to-four unit investor loans, and they do not establish current market practice or the terms of any other loan. The illustrative draw example is not a real transaction. Nothing here replaces review of the actual term sheet, loan agreement, construction contract, title documents, and complete file, or advice from qualified legal, tax, and construction professionals.