Short answer: A ground-up construction loan funds land acquisition and vertical construction on a draw schedule, sized at roughly 75–85% of total cost or 65–70% of as-complete value, whichever is lower. Terms run 12–24 months at floating rates, with 1–3 points of origination, full recourse, and a completion guarantee. The lender controls disbursement, holds retainage, and requires a licensed GC with a fixed-price or GMP contract on most deals.
What separates ground-up from everything else
With a rehab or bridge loan, there is an existing building. If the sponsor walks away at month eight, the lender forecloses on something — a partially renovated but standing structure with salvage value.
With ground-up, there's a hole in the ground and a pile of framing lumber. A half-built house is worth less than the dirt it sits on, because the next buyer has to pay to remove your work before they can start theirs.
That asymmetry drives every term in a construction loan. The lender's real risk isn't market risk, it's completion risk. Almost everything unusual about construction lending — draws, inspections, retainage, completion guarantees, GC review, contingency requirements — exists to manage the possibility that you don't finish.
Understand that and the term sheet stops feeling arbitrary.
Typical terms
Leverage → 75–90% LTC, capped at 65–75% LTARV
Land advance at closing → 50–70% of land value or purchase price
Rate → Floating, prime or SOFR + spread; often 9–13% for private capital
Origination → 1–3 points
Term → 12–24 months, extensions at 0.25–0.50%
Interest → Drawn balance (preferred) or full commitment
Interest reserve → Funded from loan proceeds
Retainage → 5–10% per draw
Recourse → Full personal guarantee below ~$10M
Completion guarantee → Standard
Contingency → 5–10% of hard costs, lender-controlled
Bank construction financing prices materially better — often 300–500 basis points inside private capital — but requires deposit relationships, stronger sponsors, lower leverage, and takes longer to close. Private and debt-fund capital costs more and moves faster at higher leverage. Choose based on which constraint actually binds your project.
For how the leverage tests interact, see LTV, LTC, and LTARV explained.
The land piece
How you got the land drives your day-one advance.
Buying land and building in one loan. Most lenders will advance 50–70% of land value at closing, with construction funds held back. You bring the balance of the land cost plus closing costs at the table.
You already own the land free and clear. This is the strongest position. Your land equity counts toward your contribution — sometimes at current appraised value, sometimes only at original cost basis. If you bought a lot for $180K that appraises at $350K, that distinction is worth $170K of equity credit. Ask which basis the lender uses before you commit.
You own land with existing debt. The construction loan has to be in first position, so the existing loan gets paid off at closing. That consumes proceeds and reduces what's available for construction.
Raw, unentitled land is a different product entirely — see land and entitlement loans.
What lenders diligence
A complete ground-up submission includes:
The project
- Site plan, architectural drawings, elevations
- Building permit or documented path to permit
- Line-item hard cost budget by trade
- Itemized soft costs — architectural, engineering, permits, legal, insurance, carry
- Contingency line of 5–10%
- Construction schedule with milestones
- Comparable sales or rent comps supporting the as-complete value
The team
- GC name, license, financials, references
- Executed construction contract — fixed price or GMP strongly preferred
- GC's bonding capacity or a payment and performance bond on larger projects
The sponsor
- Personal financial statement
- Schedule of real estate owned
- Track record of completed projects with addresses, costs, and outcomes
- Two years of tax returns and current liquidity verification
- Entity documents and certificate of good standing
The gap between a package that gets a quote and one that gets ignored is almost entirely completeness. A budget without a contingency line and a GC contract signals a sponsor who hasn't done this before, regardless of what the track record says.
More on that in what lenders look for in a sponsor track record.
Cost-plus vs. fixed price
Lenders care intensely about your GC contract structure.
Fixed price / lump sum. GC commits to a number. Overruns are their problem. Lenders love it, and it usually gets you better leverage.
Guaranteed maximum price (GMP). Cost-plus with a ceiling. Savings are shared or returned to the owner. Nearly as good as fixed price from a lender's view, and more common on custom work.
Cost-plus, open ended. GC bills costs plus a fee, no cap. Every overrun lands on you and, by extension, on the lender's contingency. Many construction lenders won't fund this structure at all, and those that do will require larger contingency and lower leverage.
Owner-builder. You act as your own GC. Possible on smaller residential projects with a real track record, but expect reduced leverage and extra scrutiny. On anything above a few million, most lenders decline.
The costs beyond the rate
Model these before you compare term sheets:
- Origination: 1–3 points, paid at closing
- Interest reserve: funded from the loan, consumes proceeds you might have wanted for construction
- Inspection fees: $150–$500 per draw, 6–15 draws typical
- Appraisal: $2,500–$15,000 for as-is and as-complete on residential; more on commercial
- Plan and cost review: $1,500–$5,000, common on larger loans
- Legal: lender's counsel on your dime, $3,000–$25,000 depending on complexity
- Title, survey, recording
- Exit fee: 0–1% at payoff on some programs
- Extension fee: 0.25–0.50% per extension
On a $2M construction loan, total closing costs of $60,000–$90,000 are normal. That's cash at the table on top of your equity.
Where ground-up deals go wrong
Budgets without contingency.
If you submit a budget with no contingency, the lender adds one and takes it out of your proceeds. Build 7–10% in yourself and control it.
Optimistic schedules. A 12-month schedule on a project that realistically takes 16 means your interest reserve runs dry at exactly the wrong moment. Size the interest reserve to the honest timeline.
Permits "in process." Lenders will issue a term sheet subject to permit but generally won't fund vertical construction without one. If your permit is contested or requires zoning relief, expect to fund land acquisition only until it's resolved.
Undercapitalized working capital. Construction loans reimburse; they don't advance. You need float to carry a full draw cycle. See how draw schedules work.
No exit lined up. The lender wants to see the takeout — a listing strategy with comps, or a permanent lender's expression of interest. "We'll figure it out" is not an exit.
FAQ
How much do I need to put down on a ground-up construction loan?
Typically 15–25% of total project cost, plus closing costs and working capital float. Land you already own can count toward that.
Can a first-time builder get a construction loan? Yes, at lower leverage — often 65–70% LTC instead of 85% — and usually only with an experienced licensed GC under a fixed-price contract.
How long does it take to close? Three to six weeks for private and debt-fund capital, given complete plans, budget, and permits. Bank construction financing runs 45–90 days.
What's a completion guarantee? A separate guarantee, signed personally, obligating you to complete the project even if the loan proceeds run out. It survives independently of the payment guarantee and is standard on nearly every construction loan.
Does the loan convert to permanent financing? Only on a construction-to-perm product, common for owner-occupied. Investor and spec construction loans are interest-only and require a separate takeout — sale or refinance.
Building ground-up? Send the plans, budget, and land status and Hub Financing will tell you where it finances, at what leverage, and what the term sheet should actually say. We arrange construction debt nationwide and are compensated by lenders at closing — no fee to borrowers.