Building Your Dream: A First-Time Builder’s Guide to Ground-Up Construction Loans

There’s nothing like your first home build.

For builders taking their first steps into ground-up construction, the project presents both a significant opportunity and a unique challenge.

This new opportunity requires the right type of financing to turn it into a reality.

In this article, we’ll explain what it takes to get a loan for your ground-up construction project, from eligibility to closing and beyond.

What are ground-up construction loans?

Ground-up construction loans provide flexible financing through a draw process matching a home build’s completed phases.

Unlike traditional loans, which cover purchasing preexisting structures, ground-up construction loans cater exclusively to those looking to develop vacant land into residential properties.

Does a construction loan include land?

Construction loans cover nearly all aspects of the home building process from start to finish, including:

• Land
• Permits
• Architectural and design fees
• Site preparation
• Labor
• Materials
• Equipment

Construction loans are short-term, typically ranging from one to two years. Borrowers generally pay interest only on the portion of the loan that has been dispersed.

Once construction has been completed, the loan balance must be repaid through a property sale or refinanced into a permanent mortgage.

Eligibility criteria for first-time builders

Traditional lenders such as banks or credit unions generally offer construction loans to borrowers intending to build an owner-occupied home, and they often are structured as construction-to-permanent loans.

Builders require a more flexible option tailored to their unique scenario. For these types of borrowers, hard money loans are the ideal solution.

Hard money ground-up construction loans generally have the following approval requirements for builders:

• Must have a general contractor if you’re a new builder or have had less than three builds in the past 36 month
• Property appraisal
• Detailed build plan, including an estimated timeline, budget, and exit strategy
• Urban and suburban areas
• Loan-to-value ratio (LTV) above 70-75%
• Bank statements and credit score information
• Down payment is dependent on project details and equity
• Closing costs and fees

The application and approval process for hard money loans is much quicker than traditional lending, and closings often can occur in as fast as seven to 10 business days.

Hard money lenders understand the needs of home builders and the importance of timing for construction projects.

The construction loan process: step-by-step application

Your new build requires certain steps for the pre-application and application processes.

Let’s take a look at each.

Pre-application

1. Gather documentation: Check with your lender for specifics, but generally, you will need to provide bank statements and a detailed build plan and budget
2. Choose a general contractor: Park Place Finance requires a contract with a licensed general contractor or builder for the first few builds
3. Perform legal checks: Present the purchase contract or land title and determine the required zoning and building permits

Application

1. Submit your application: Complete and submit the application provided by your lender, which will include personal information, financial details, and construction project specifics
2. Lender assesses application: Your lender will review your plans and documentation and request additional information as needed
3. Property is appraised: An appraisal will help the lender confirm the projected value of the property and the loan amount
4. Lender moves forward with approval: If all the details check out, your lender will approve your loan!
5. Loan closing process begins: All parties will sign the necessary documentation, and the lender will arrange the initial disbursement of funds
6. Loan funds disbursed in stages: After closing, construction begins, and the loan funds will be disbursed based on predetermined construction milestones—which will be confirmed with inspections or progress reports

Ground-up construction loans have a complex process with many moving parts.

Maintaining open communication with your lender is the best solution for keeping your project on track and maximizing your ROI.

Hard money lenders like Park Place Finance aren’t just your lender; they are your lending partner—they are there to offer support throughout the loan process and beyond.

Building a relationship with your hard money lender is a wise move that helps set you up for success with future projects.

Construction loan draw schedule

Unlike loans that disburse funds in a lump sum, ground-up construction loans provide funds in phases that correspond with project phases.

Typically, the initial draw covers land acquisition, permit fees, and site preparation costs.

Following the initial draw, funds are released based on the stages you and your lender have discussed.

“Stages” might include:

• Roof and windows
• Plumbing
• Electrical work
• Interior work

Lenders typically schedule the disbursements based on the construction timeline and budget you submitted during the application process.

Tips for successful project management

Strong project management is directly tied to the success of your build.

Here are some pro tips for effective management:

• Choose a reputable, experienced general contractor/builder
• Establish clear lines of communication
• Detail all agreements in a contract
• Create a thorough and realistic budget
• Anticipate project delays—and be flexible
• Document any changes in scope or material and determine their impact on your plan and budget
• Regularly review your budget

Maintain open communication with your lender because delays will likely impact your draw schedule.

Your lender is likely to be able to help you navigate project challenges if you regularly communicate with them and discuss potential concerns as they arise.

Final steps in ground-up construction loan

Once construction is completed and your final draws have been disbursed, it’s time to repay your loan’s remaining balance.

If you intend to sell the property immediately, you can begin staging it for showings and working with real estate agents to market it.

The more quickly you can attract a buyer, the sooner you can repay the construction loan and realize your profit.

If you decide to hold onto the property or turn it into a rental, you can refinance your construction loan into a long-term option, such as a debt service coverage ratio (DSCR) loan.

Apply for a ground-up construction loan with Park Place Finance

When you choose to work with Park Place Finance, you can rest assured that a team of real people will be dedicated to funding your deal as quickly as possible.

We are your trusted hard money lender, with over $1 billion in loans funded since 2006—and we hope your ground-up construction project is next!

Start by completing our brief online form, or call us at (866) 407-1599.