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How do construction loans work? A plain guide
A construction loan pays for building a house in stages. Here is how the loan is sized, how the money is paid out and what happens from lot to sale.
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Estimate only. Loan amount is 90% of lot price plus build budget. Business-purpose loans on investment property, not homes you will live in.
The short version
The lender agrees to a total loan amount before you start. It pays for the lot at closing, then pays the build budget in draws as each stage is completed and checked. When the house sells, the loan is paid off.
How the loan amount is set
With us the loan is 90% of your lot price plus build budget.
| Deal | Amount |
|---|---|
| Lot price | $60,000 |
| Build budget | $260,000 |
| Total cost | $320,000 |
| We fund 90% | $288,000 |
| Sale price when finished | $430,000 |
| You bring (10%) | $32,000 |
The construction loan process
- See your terms. Lot price, build budget and the expected sale price.
- Apply. Plans, budget, entity documents, ID and credit.
- Close. The lot is paid for and the build budget is set aside.
- Build and draw. Each completed stage is inspected and paid.
- Sell. The sale pays off the loan.
A typical construction draw schedule
| Typical draw | Work completed |
|---|---|
| 1. Foundation | Slab or foundation poured and inspected |
| 2. Framing | Walls, roof framing and sheathing up |
| 3. Dry-in | Roof, windows, doors and house wrap on |
| 4. Rough-ins | Plumbing, electrical and HVAC run |
| 5. Drywall and interior | Drywall, cabinets, trim |
| 6. Finish | Paint, flooring, fixtures, final inspection |
The exact stages are set for each loan from your budget.
Questions builders ask
Straight answers about how do construction loans work.
How do construction loan draws work?
After each stage of the build is completed, it is inspected and the money budgeted for that stage is released.
What is a construction draw schedule?
The list of build stages and the amount paid out when each one is completed.
How much of my build do you fund?
We fund 90% of your total cost: the lot price plus the build budget. You bring the other 10%.
Do I need building experience?
No. We lend to first-time builders with no completed projects, as well as to experienced builders.
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