New Construction Loan Requirements

Land owned free and clear

Full appraised land value counts as equity. Example: land appraised at $200K, total project cost $800K — the land covers the 25% equity requirement entirely, subject to lender policies.

Land with an existing loan

Only the unencumbered equity counts. If the land is worth $200K and carries a $120K loan balance, only $80K of equity applies toward the down payment requirement.

Seasoning requirements on land

Some lenders require the land to have been owned for a minimum period (commonly 6–12 months) before crediting it as equity. Land purchased immediately before construction may be valued at cost rather than appraised value.

Land-only appraisal required

The construction loan appraisal covers both the as-is land value and the as-complete project value. The as-is land value is the figure used in the equity calculation.

It is difficult, but not impossible in every case. Most private and institutional construction lenders require demonstrated experience with comparable projects. First-time builders typically face three options: partner with an experienced developer who takes an equity stake and oversees the project; use a general contractor with a strong track record who effectively sponsors the construction component; or start with a smaller, lower-risk project that the capital partner is comfortable funding based on borrower financial strength. Strong liquidity and net worth can partially offset inexperience at some lenders.

Most construction lenders require 20–30% of total project cost as equity, which can come from land equity (if the land is owned free and clear) or cash. On top of the down payment, lenders typically require cost overrun reserves of 10–20% of the construction budget, plus an interest reserve in some cases. Total capital requirements for a construction loan often reach 35–50% of the total project cost when all reserves and closing costs are included.

Many lenders prefer or require permits to be in hand before closing. Some will close with permits ready to pull, meaning approved but not yet issued. Going to a lender before permits are even applied for significantly limits which capital partners will engage. The permit status directly affects how quickly the lender can fund the first draw and start the project, so having permits in hand tends to shorten the overall timeline.

Construction lenders typically require complete architectural plans stamped by a licensed architect, an itemized construction budget broken down by trade, a construction schedule with milestone dates, a signed general contractor agreement, building permits or confirmed permit-ready status, an appraisal showing both as-is land value and as-complete project value, a market analysis supporting the exit strategy, and borrower financial documentation including credit, liquidity, and net worth verification.

Yes. Build-to-rent is a common exit strategy for new construction loans. In this structure, the investor builds the property, rents it out, and then refinances into permanent financing — often a DSCR loan — once the property is stabilized and producing rental income. The lender will want to see that the projected market rent supports the permanent debt at the expected loan-to-value. Investors planning a build-to-rent exit should model the DSCR refinance requirements before committing to the construction budget.

Shovel-ready means the project is fully permitted, the contractor is under contract, and construction can begin immediately after closing. Most construction capital partners prefer or require shovel-ready status before committing funds. A project that still needs permit approval, contractor selection, or plan revisions carries timing risk that many lenders are not willing to absorb. Being shovel-ready at the time of submission typically shortens the lender review process and increases the likelihood of approval.

Land equity is the difference between what the land is worth and what is owed on it. If you own land free and clear, the full appraised land value typically counts as equity toward the construction loan's down payment requirement. If you purchased the land with a loan, only the unencumbered portion counts. Some lenders require the land to have been owned for a minimum period before they will credit it as equity. The appraisal will establish the as-is land value that the lender uses in their equity calculation.

After construction completes and a certificate of occupancy is issued, the investor leases the property and then refinances the construction loan into a DSCR loan. The DSCR lender will order a new appraisal reflecting the completed property value, require an executed lease or market rent documentation, and underwrite based on the property income relative to the new debt service. The key planning step is confirming before construction begins that the projected rents and completed value will support the DSCR ratio at the loan amount needed. If the exit math only works at optimistic assumptions, the strategy carries meaningful risk.

Before each draw disbursement, the lender sends a third-party inspector to verify that the work claimed on the draw request has actually been completed and meets quality standards. The inspector produces a report estimating percentage of completion for each line item in the budget. Lenders typically release funds only up to the inspector-verified percentage — meaning if the draw request claims 100% completion on framing but the inspector verifies 85%, the disbursement is reduced accordingly. Borrowers should plan for 3–10 business days between submitting a draw request and receiving funds.

Construction loans are generally priced higher than bridge or DSCR loans due to the extended timeline, complex draw-based funding structure, and greater lender risk during an active build. Private and hard money construction lenders typically charge more than traditional bank lenders. Rate varies based on borrower experience, project complexity, leverage (LTC), lender type, and market conditions. Because construction loan pricing is highly deal-specific, investors should request scenario-specific terms from lenders rather than relying on general ranges. A full deal review — including budget, plans, borrower profile, and exit strategy — is typically required before a lender will quote terms.

A private construction loan with complete documentation typically takes 30–60 days from submission to closing, and sometimes longer. Unlike bridge loans, which can close in 7–14 days on straightforward deals, construction loans require a full appraisal showing both as-is land value and as-complete project value, a detailed review of the construction budget and plans, contractor vetting, and title work on the land parcel. Projects that are shovel-ready at submission — permits in hand, contractor under contract, plans finalized — tend to move fastest. Documentation gaps or pending permits add meaningful time to the timeline. Illustrative — actual timelines depend on lender, documentation completeness, and deal complexity.

A construction-to-permanent loan (sometimes called a one-time close or OTC loan) is a single loan structure where the construction financing automatically converts to permanent financing once the project is complete and stabilized, without requiring a second closing. This structure avoids a second set of closing costs and a second appraisal, but typically requires the permanent loan terms to be set at the original construction loan closing — before the project is built or stabilized. A two-close structure uses a separate construction loan followed by a separate permanent loan (such as a DSCR loan), which allows the permanent loan terms to be negotiated closer to the stabilization date. Most private lenders in the investor-focused construction space offer two-close structures; true one-time-close programs are more commonly available through institutional or bank lenders.