What a construction lender looks at before funding your first ground-up build

Question

I've seen a few threads this week from people planning their first spec build, so here's what's actually on the checklist when a ground-up loan gets underwritten. Most of it you can line up before you even buy the lot.

Your track record, in your own name. This is the big one. Lenders want to see completed builds tied to you or your entity, ideally in the same market and at a similar price point. Experience as a wholesaler or flipper helps, but it's not the same thing. If you don't have builds yet, partnering with a builder who does, and having them on the deal, is often the path.

Comps for the finished product. The ARV has to be supported by nearby new construction sales, not by older homes with a renovation. Outside of big metros this gets harder, and it's where a lot of first builds get cut back.

A real budget. Line items, not one number per phase. Your cost per square foot gets compared to what's normal for that market and finish level, and a budget that looks too cheap is as much of a red flag as one that looks padded. Build in a contingency.

The paperwork on the dirt. Survey, plans, and a clear picture of where permits stand. If you already own the lot, expect to show what you paid for it.

A draw schedule that matches how the house gets built. Foundation, framing, dry-in, mechanicals, finishes. Know that most draws reimburse completed work, so you need cash to carry each stage until the inspection clears.

And liquidity. Builds run long. Lenders want to see you can cover interest and a surprise or two without the project stalling.

Full disclosure, I'm on the lending side and work with builders. Curious what tripped up other first-time builders here.

Juan Hasbun · Answer

As someone on the lending side at Anchor Loans, I'd add that the biggest thing we look for on a first ground-up build is whether the borrower has a realistic plan from start to finish.

A lot of first-time builders focus on the construction budget, but we spend just as much time looking at the exit strategy.

Questions we typically ask ourselves:

• Is the ARV supported by recent new construction comps?
• Does the budget make sense for the size and finish level of the home?
• Does the timeline seem realistic?
• Does the borrower have enough liquidity to handle delays or overruns?
• If this project takes longer than expected, does it still work?

Is the ARV supported by recent new construction comps?

Does the budget make sense for the size and finish level of the home?

Does the timeline seem realistic?

Does the borrower have enough liquidity to handle delays or overruns?

If this project takes longer than expected, does it still work?

For first-time builders, the most common issue I see isn't the deal itself. It's underestimating how much cash is needed between draws. Ground-up construction isn't like a flip where a lot of the work is visible from day one. Contractors, suppliers, and permit costs often need to be managed before the next draw is released.

Another thing that helps tremendously is having an experienced team in place. A strong GC, complete plans, realistic budget, and a clear construction schedule go a long way in building confidence with a lender.

The deals that tend to move the smoothest are usually the ones where the borrower has already answered the questions we're going to ask before we ask them.

For anyone planning their first build, my advice would be to spend as much time validating the budget, timeline, and exit strategy as you do designing the house. A great set of plans won't save a project if the numbers don't work.

Diana Khan · Answer

@Cat Rauh, I think one thing that can catch first time builders off guard is when the construction contract and the lender's draw schedule don't line up. A contractor might expect payment before the lender is ready to release the funds. I'd want to make sure those terms are clear before construction starts, including how delays and unexpected costs will be handled.

I'm a real estate attorney and investor based in Maryland, and I work with clients on contracts and property transactions. I've seen how important clear payment terms and responsibilities are when several people are involved in a project. It's much easier to address those issues before signing than when a disagreement comes up later.

Thanks for sharing this, @Cat Rauh! You brought up some important points for anyone planning their first build. Happy to stay connected!

Max Comperatore · Answer

Cat, Juan and Diana are all pointing at the same underwriting reality: the loan is sized off the weaker of cost and exit, then stress-tested for time. Juan's "does it still work if it runs three months long" is the right lens. Diana's draw contract mismatch is where first builds bleed cash.

The sizing formula is straightforward. Max loan = min(LTC ceiling x total project cost, LTARV ceiling x ARV). Assume land $400k, hard costs $1.2M, soft costs $150k, 12% hard cost contingency of $144k, and interest reserve. Total cost before reserve is $1.894M. At a 65% LTC ceiling (typical max 65% to 70%), loan is $1.231M. At 65% LTARV (typical max 60% to 65%) on a $2.4M ARV, the ceiling is $1.56M. The binding loan is $1.231M, so equity check is $663k before reserve and closing costs.

Interest reserve math: $1.231M at SOFR plus 375 bps, say 9.05%, 12 months, 55% average outstanding, equals about $61k. That reserve usually gets sized inside the loan budget, which reduces cash available for hard costs. Add 10% to 15% hard cost contingency in escrow, here $120k to $180k, and the lender is watching whether you can fund a short draw.

GC vetting is balance sheet work too. Bonding capacity should cover the full hard cost contract, liquidity should be at least 10% of that contract, and prior completed builds should be equal to or greater than this scale. Personal completion and repayment guaranties are standard. Expect the lender to tie draw stages to inspection, so the GC contract must state what happens when a draw comes in short.

Question: on your first build, what is your realistic months-to-completion sensitivity, and how much extra liquidity does a three-month delay require?

Cat Rauh · Answer

@Juan Hasbun agreed on the exit. "Does it still work if it runs three months long" is the question I wish more first-time builders asked themselves before we do.

@Diana Khan that's a really practical one. The contractor's payment schedule should be written to match the lender's draw stages, and it helps to spell out in the contract what happens if a draw inspection comes back short. Otherwise the GC is waiting on money, the borrower is in the middle, and the job slows down. Worth having an attorney look at that piece before anyone breaks ground.

What a construction lender looks at before funding your first ground-up build

What a construction lender looks at before funding your first ground-up build

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