Construction Loans: How to Finance Your Next Development Project

Construction loans are the backbone of ground-up real estate development. Whether you are building a single-family spec home, a multifamily apartment complex, or a commercial property from the ground up, construction financing provides the capital you need to take a project from dirt to certificate of occupancy.

What Is a Construction Loan?

A construction loan is a short-term financing product designed to fund the building of a new structure or a major renovation of an existing one. Unlike a traditional mortgage where you receive the full loan amount at closing, construction loans disburse funds incrementally as the project progresses through predefined milestones.

Construction loans are inherently riskier for lenders — the collateral (the building) does not exist yet. This is why construction loans carry higher interest rates and require more oversight than permanent financing. The lender is betting on the borrower’s ability to complete the project on time and on budget.

How Construction Loans Work: The Draw Schedule

The defining feature of a construction loan is the draw schedule. Rather than receiving the full loan amount at once, funds are released in a series of draws tied to construction milestones:

1. Land acquisition or site preparation — the initial draw covers purchasing the land (if not already owned) and site work.
2. Foundation and framing — once the foundation is poured and framing begins, the next draw is released.
3. Mechanical, electrical, and plumbing (MEP) — rough-in of major building systems triggers another draw.
4. Interior finishes — drywall, flooring, cabinetry, and fixtures.
5. Final completion — the last draw upon project completion and certificate of occupancy.

Before each draw, the lender sends an inspector to verify that the work has been completed according to the approved plans and budget. This process protects both the lender and the borrower by ensuring funds are used as intended.

Typical Construction Loan Terms

Construction loan terms vary based on the project type, borrower experience, and lender, but here are the ranges you can expect:

• Interest rates: 8% to 12%, typically floating over Prime or SOFR.
• Loan term: 12 to 18 months for most projects, with extension options available.
• Loan-to-cost (LTC): Up to 80% to 85% of total project cost (land + hard costs + soft costs).
• Origination fees: 1% to 3% of the loan amount.
• Payments: Interest-only on drawn funds only — you do not pay interest on undisbursed amounts.
• Recourse: Most construction loans require a personal guarantee from the borrower.
• Minimum loan amount: Typically $500K and up for commercial construction programs.

Construction Loans vs. Bridge Loans

While both are short-term financing products, construction loans and bridge loans serve different purposes:

• Construction loans fund the building of a new structure. The collateral is the project itself, and funds are disbursed through a draw schedule as work is completed.
• Bridge loans are used to acquire or refinance existing properties. The collateral already exists, and the full loan amount is typically available at closing.

Some projects blend elements of both — for example, purchasing an existing building and doing a gut renovation. In these cases, a bridge-to-construction or heavy rehab loan may be the best fit.

How to Qualify for a Construction Loan

Construction lenders evaluate the project, the borrower, and the team. Key qualification factors include:

• Development experience — lenders want to see a track record of completed projects. First-time developers may need to partner with an experienced sponsor.
• Detailed plans and budget — architectural drawings, engineering reports, a line-item construction budget, and a realistic project timeline.
• General contractor — a licensed, bonded, and insured GC with experience on similar projects.
• Entitlements and permits — zoning approvals, building permits, and any environmental clearances must be in place or near completion.
• Equity contribution — borrowers typically need to contribute 15% to 25% of total project cost.
• Exit strategy — a clear plan to repay the construction loan, whether through sale of the completed project or refinancing into permanent debt.
• Liquidity and net worth — adequate reserves to cover cost overruns and carrying costs.

Types of Construction Projects We Finance

At Passy Capital, we arrange construction financing for a wide range of project types:

• Ground-up multifamily apartment buildings
• Single-family spec homes and build-to-rent communities
• Mixed-use developments
• Commercial buildings (retail, office, industrial)
• Townhouse and condo developments
• Major gut renovations and adaptive reuse projects

How to Get Construction Financing Through Passy Capital

Our process makes construction financing straightforward:

1. Submit your deal — tell us about your project, budget, timeline, and experience.
2. We match your project with the best construction lenders from our network and present term sheets within 24 to 48 hours.
3. We guide you through underwriting, appraisal, and closing — and support you through the draw process during construction.

Use our loan calculator to estimate your monthly interest payments, or submit a deal to get started on your next development project.