Home› Products› New Construction Loan

New Construction Loan

Ground-up construction financing for residential and commercial real estate — interest-only draws, conversion to permanent at completion.

Why This Product is Life-Changing for Businesses

New construction loans unlock the highest-margin real estate strategy available: building from the ground up. Unlike acquisition financing, construction lending lets developers capture the full spread between cost-to-build and as-completed market value — typically 20-30% gross margins for disciplined residential builders (NAHB reports spec builders averaged 21.3% net profit in 2023, the highest since 2006). For non-bank borrowers (self-employed, foreign nationals, credit-challenged), private construction financing is often the only path to ground-up development.

Industry context: Housing supply remains chronically short — NAR reported 3.1-month supply as of mid-2024, far below the 6-month balanced market threshold. 1.1 million homes were projected to be constructed in 2025, a 13.8% increase from 2024. Approximately 86% of spec projects are profitable with proper execution.

Developer Partnership Scales a Subdivision (China Grove, NC)

Business: Residential real estate development partnership (Concord, NC area) Loan: $836,000 new construction loan from iFundCities, closed within one week Situation: Two established developers merged to take on larger projects. They secured bank financing for their first three lots in a China Grove subdivision, but hit a wall: the bank capped total exposure and draw processing was slow, dragging out timelines and inflating holding costs. Outcome: Went from stuck at 3 lots to building on 6+ lots simultaneously. Cash received at closing funded three additional lot acquisitions. Draw requests processed at "lightning-fast" speed per the lender, keeping momentum and reducing holding costs. Demonstrated how private lending structurally outperforms bank financing for subdivision-scale work. Source: iFundCities Case Study

Safari Kid Preschool — $7.7M Ground-Up Construction (Dublin, CA)

Business: Childcare / preschool franchise (Safari Kid), co-owners Kiran Vuriti and Chandra Sirapu Loan: 7.7MtotalprojectviaSBA504, facilitatedbyTMCFinancing—10770K), long-term below-market fixed rate Situation: Already operated four Safari Kid franchise locations. Wanted to build a purpose-designed flagship from scratch. Traditional banks refused to finance a construction project of this size for a school. Outcome: Built a 15,000 sq ft preschool facility with 12,000 sq ft outdoor play area and 4,500 sq ft multi-purpose room. Maximum capacity of 165 children. Transformed from leasing space across four locations to owning a purpose-built campus — a permanent appreciating asset. Source: TMC Financing Case Study

Liberty Pole Spirits — Craft Distillery Campus (Washington, PA)

Business: Craft spirits distillery (Liberty Pole Spirits / Mingo Creek Craft Distillers), owners Jim and Ellen Hough Loan: SBA 504 (facilitated by Pursuit Lending and Washington Financial bank) + PA Redevelopment Assistance Capital Program (RACP) grant + private capital raise. ~18 months planning, 15 months construction. Situation: Started as a retirement hobby idea. Outgrew their original downtown Washington, PA location as their bourbons grew in popularity. Needed a purpose-built production campus — a complex multi-building ground-up project. Outcome: Grand opening July 15, 2023. New campus includes 14,000+ sq ft across multiple buildings: tasting room modeled after an 18th-century Meetinghouse, springhouse bar, state-of-the-art production facility with 1,000-gallon mash cooker, four 1,000-gallon fermenters, and 1,000-gallon pot still (Vendome Copper), plus a 3,600-barrel 5-floor rickhouse. Production capacity nearly tripled. Maximum capacity can expand to 60,000 gallons/year (1,100+ barrels). Sources: Pursuit Lending | Visit Washington County PA | Craft Spirits Magazine | Bear IC (GC)

406 Window Co. — Custom Commercial Facility (Billings, MT)

Business: Retail window and door supplier, owners Brian and Robin Reay (operating since 1995) Loan: SBA 504 via Big Sky Finance (CDC) and Stockman Bank of Billings — 10% down, long-term fixed rate Situation: Operations scattered across multiple locations for 27 years. No unified showroom, office, or warehouse. Needed to consolidate and own rather than lease. Outcome: Built a nearly 10,000 sq ft purpose-built facility with expansive showroom, offices, and warehouse. Eliminated lease costs, improved workflow efficiency, and created a permanent professional presence. Transformed from "established small business" to "permanent local institution." Source: Big Sky Economic Development

Charlotte Townhome Developer — 13-Unit Build (Charlotte, NC)

Business: Residential townhome developer/builder (Charlotte, NC) Loan: 4, 420, 000newconstructionloanfromiFundCities, 70 * *Situation : * * Identified13townhomelotsinadesirable, up − and − comingneighborhood.Existinglendersimposedvolumelimitsonlandacquisitions, restrictinghowmanylotscouldbeacquiredandbuiltsimultaneously.Capitalrequiredperlotwastoohighundertraditionalbankterms. * *Outcome : * * Acquiredall13lotsandproceededwithverticalconstructionacrossthefullprojectsimultaneously—vs.beinglimitedto4 − 5unitsatatimebybankvolumecaps.Averageper − unitfinancingof 340K. The 70% LTV on land "drastically decreased cash to close" and freed capital for the full build. Source: iFundCities Case Study

Documentation Required for Full Underwriting

Key distinction: Construction loans require significantly more documentation than standard acquisition loans because the collateral doesn't yet exist. The lender must underwrite the borrower, the project feasibility, and the construction execution risk simultaneously.

Borrower Documents

Document Private/Hard Money Bank Construction SBA 504 Construction
Loan application (signed) Required Required Required
Personal tax returns 0-2 years (often not required) 2-3 years 3 years
Business tax returns Typically not required 2-3 years (with K-1s) 3 years
Personal financial statement Required Required SBA Form 413
Bank statements (liquidity proof) 1-3 months 3-6 months 3-6 months
Credit report authorization Required (min ~600+, some no minimum) Required (min ~680+) Required (min ~680+)
Government-issued ID All guarantors All 20%+ owners All 20%+ owners
Resume / construction experience Required (critical) Required Required
Personal guarantee All members/guarantors All 20%+ owners All 20%+ owners
Schedule of real estate owned Required Required (global cash flow analysis) Required
W-2s / 1099s / pay stubs Typically not required 2 years 2 years

Sources: Marquee Funding Group | Alta Capital Group | Texas Bankers Association | CU Web Training

Entity / Business Documents

Document Required By Notes
Articles of Incorporation / Organization All lenders Filed with Secretary of State
Operating agreement / bylaws All lenders Most scrutinized entity doc per Marquee Funding Group
EIN verification letter All lenders IRS Letter 147C or SS-4
Certificate of good standing All lenders Current, from Secretary of State
Corporate/LLC resolution to borrow Bank / SBA Authorizes the loan and designates signatories
Organizational chart Bank (complex deals) Shows ownership %, parent/subsidiary relationships
Contractor's license Bank Lender verifies directly with licensing board

Sources: Marquee Funding Group | Texas Bankers Association

Project / Property Documents

Document Purpose Required By
Architectural plans & specifications Defines scope, validates budget — foundation of entire loan package All lenders
Detailed construction budget (line-item) Lender verifies cost reasonableness — the most important construction document All lenders
Draw schedule (disbursement timeline) Maps budget to 4-6 construction milestones All lenders
Building permits (or permit-ready status) Confirms entitlements are in place All lenders
Appraisal — as-is land value Current collateral value All lenders
Appraisal — as-completed value Projected value drives LTV calculation All lenders
Title commitment / preliminary title report Confirms clear title, identifies liens — updated with each draw All lenders
Title insurance policy/binder With mechanic's lien coverage All lenders
Proof of land ownership or purchase contract Confirms site control All lenders
Site survey / ALTA survey Confirms boundaries, easements, setbacks (ALTA for commercial) All lenders
Zoning confirmation / entitlement letters Confirms permitted use All lenders
Flood zone determination / FEMA flood certificate Regulatory requirement for federally regulated lenders All lenders
Environmental report (Phase I ESA) Identifies contamination risk (ASTM E1527-21) Bank / SBA (private varies)
Geotechnical / soils report Validates structural feasibility, foundation design Most lenders
Utility will-serve letters Confirms water, sewer, electric, gas access Bank / SBA
Market / feasibility study Validates demand and absorption Bank (commercial >$2M)

Sources: OCC Examination Handbook 213 | ATG Financial Checklist | CEFCU Checklist

Construction-Specific Documents

Document Purpose Required By
General contractor (GC) agreement Defines scope, price, timeline, change order procedures All lenders
GC license verification Active state contractor license, verified by lender All lenders
Builder's risk / course of construction insurance Covers property during construction; lender named as Loss Payee All lenders
General liability insurance (COI) Min $1M policy; lender/borrower as Additional Insured All lenders
Workers' compensation insurance (COI) Per state requirements for all GC employees All lenders
GC resume / track record (completed projects) Proves execution capability with comparable projects All lenders
Subcontractor bids (major trades) Validates budget line items Most lenders
Subcontractor COIs (GL + workers' comp) Verifies subcontractor coverage Most lenders
Lender assignment of GC contract Bank can step into owner's shoes if borrower defaults Bank / SBA
Payment & performance bond Guarantees GC completion; 100% of contract value Bank (large commercial), public projects >$150K (Miller Act)

Sources: Land Gorilla | Levelset | Federal Acquisition Regulation Part 28

Exit Strategy Documents

Document Required By Notes
Exit strategy narrative All lenders (critical for private) Sell, refi to perm, or construction-to-perm conversion
Take-out commitment / perm financing commitment Bank (situational) Written commitment from permanent lender
Pre-sale contracts Bank (for-sale speculative projects) 30-70% pre-sale may be required
Pre-lease agreements / LOIs Bank (commercial) Demonstrates demand
Pro forma operating statement Bank (income-producing) Must show DSCR >1.20x-1.25x on perm

Sources: American Heritage Lending | Walker & Dunlop

Product-Specific Variations

Private/Hard Money Construction:

  • Lighter documentation on borrower income (asset-based underwriting)
  • Heavier emphasis on project feasibility, exit strategy, and borrower liquidity/reserves
  • May require a completion reserve (typically 5-10% of budget held back, up to 15%)
  • Shorter track record acceptable if partnered with experienced GC
  • Timeline: 1-4 weeks from application to closing

Bank Construction:

  • Full income documentation and global cash flow analysis
  • Pre-sale or pre-lease requirements common for larger projects
  • Interest reserve typically required (sized to cover full construction period — 6-12 months residential, 12-24 months commercial)
  • Construction monitoring/inspection by bank-hired third party
  • Timeline: 60-120+ days from application to closing

SBA 504 Construction:

  • All standard SBA documentation (Form 1919, 912, 413, business plan). Note: Form 1920 was eliminated in December 2023 per SBA Information Notice 5000-852422.
  • CDC (Certified Development Company) involvement as intermediary
  • Job creation projections required (1 job per $90K of SBA debenture — threshold may be updated per September 2025 Federal Register notice)
  • Interim construction financing from a bank, with SBA 504 as the permanent take-out

Process Flow: Application to Funding

Construction loans have a unique two-phase structure: (1) the pre-construction closing process, and (2) the construction draw period. Unlike a standard purchase loan that funds once at closing, construction loans disburse funds incrementally as work progresses.

Loan Structure Decision: Single-Close vs. Two-Close

Before the process begins, the borrower (with broker guidance) selects a loan structure:

Single-close (construction-to-perm): One application, one closing, one set of closing costs. Automatically converts to permanent mortgage upon completion. Rate locked at origination. Borrower does NOT need to re-qualify. Slightly higher rate but saves thousands in duplicate costs.

Two-close: Separate construction loan and permanent mortgage. More flexibility to shop perm financing post-build. Risk: borrower must re-qualify; credit/income changes during build could cause denial.

Sources: GO Mortgage | Fannie Mae B5-3.1-01 | Fannie Mae B5-3.1-02

End-to-End Process

Phase Description Who's Involved Timeline
1. Pre-qualification & builder selection Borrower assesses financial readiness. Broker/lender provides pre-qual letter. Borrower selects licensed GC (lender must approve). Borrower, broker, lender, GC 1-4 weeks
2. Application & document collection Formal application with deposit. Broker packages full loan file: financials, plans, budget, GC contract, entity docs. Borrower, broker, lender, GC, architect 1-2 weeks
3. Appraisal (as-complete value) Lender orders "subject-to completion" appraisal — future market value based on plans & comps. Also as-is land value. Valid 120-180 days. Lender, appraiser, GC 2-4 weeks
4. Underwriting & approval Full file review: borrower strength, project feasibility, budget reasonableness, builder qualifications, exit strategy. Conditional approval with conditions ("stips"). Lender underwriting, broker, borrower 2-4 weeks
5. Condition clearance Borrower satisfies all conditions: final permits, insurance bound, GC finalizations, title clear. Borrower, GC, insurance agent, title 1-2 weeks
6. Closing & initial draw Loan documents signed. Initial draw funds land payoff and/or builder mobilization (10-15% of loan). Construction account & interest reserve established. Borrower, lender, title company, attorney 1-2 weeks
7. Construction & draws (recurring) GC builds per draw schedule. At each milestone: draw request submitted with invoices + lien waivers -> title update -> third-party inspection -> lender review -> funds released. GC, subs, borrower, inspector, lender, title 6-12 months (residential)
8. Final inspection & CO Municipal final inspection -> Certificate of Occupancy. Borrower walkthrough + punch list. Lender's final inspection confirms as-built matches plans. Municipality, GC, borrower, lender, appraiser 2-4 weeks
9. Exit / permanent financing Single-close: automatic conversion to perm (modification agreement, ~3 weeks). Two-close: full new application, underwriting, and closing (30-60 days). Or sell the property. Borrower, broker, perm lender, title 2-8 weeks

Typical Total Timeline:

  • Pre-construction (phases 1-6): 10-16 weeks
  • Construction phase (phase 7): 6-12 months (residential), 12-24 months (commercial)
  • Final completion & exit (phases 8-9): 4-12 weeks
  • Total from application to exit: 9-18 months

Sources: The Federal Savings Bank | Ascend Bank | Clearhouse Lending

Draw Process Deep Dive

The draw process is the defining feature of construction lending and the most operationally intensive:

Typical draw schedule (5-6 draws):

Draw Phase % of Loan What It Covers
1 Site work & foundation 10-15% Excavation, grading, foundation pour, utility rough-in
2 Framing 20-25% Structural framing, roof trusses, sheathing, windows/doors
3 Mechanical rough-in 15-20% HVAC, plumbing, electrical (before drywall)
4 Exterior / dry-in 10-15% Roofing, siding, exterior trim and paint
5 Interior finishes 15-20% Drywall, flooring, cabinets, countertops, fixtures, paint
6 Final / completion 5-10% Landscaping, driveway, punch list, appliances

Sources: Certain Lending | Building Advisor | Groundfloor | Marquee Funding Group

Each draw cycle:

  1. Draw request submitted by borrower/GC with: invoices, lien waivers (unconditional for prior draw, conditional for current), contractor's sworn statement, updated budget vs. actual, progress photos
  2. Title update — title company checks for mechanic's liens since last draw
  3. Inspection — third-party inspector verifies completion % matches request (100−400 per inspection, charged to borrower)
  4. Approval & funding — lender reviews full package, wires funds (3-10 business days from request; technology-forward lenders processing in 3-5 days)
  5. Retainage — lender withholds 5-10% of each draw. Released 30-60 days after final completion + all unconditional lien waivers collected

Interest during construction: Accrues only on amounts drawn, not full commitment. If interest reserve established at closing, payments are automatic. Otherwise borrower pays monthly out of pocket.

Sources: Mastt | ABL Funding | American Heritage Lending | Built

Common Bottlenecks & Delays

  • Missing lien waivers: The single most frequent operational holdup — subs who've moved to other jobs are slow to return paperwork
  • Permitting: Municipal backlogs can add 4-8 weeks in high-growth areas
  • Appraisal: As-completed appraisals can take 3-4 weeks; low valuations may require redesign or more equity
  • Budget disputes: Lender's cost reviewer may challenge line items, requiring rebids
  • Weather / supply chain: Sites lose 2-5 days/month to weather on average; material cost volatility from tariffs can force rebudgeting
  • Change orders: Scope changes require lender approval and budget reallocation — can pause draws
  • Interest reserve depletion: Longer-than-expected construction burns through reserve; borrower must pay out of pocket
  • Extension fees: If loan matures before completion — 1-2 points (private), 0.25-0.5 points (bank) + per-diem interest

Sources: Paterson Development | NewHomeSource | Stormfield Capital

Broker Commission Ranges

Construction loans are among the highest-commission products in real estate lending because of their complexity, longer sales cycle, and the expertise required to structure and place them. C-Loans explicitly advises that "a broker should charge at least one extra point on construction loans" versus permanent financing.

Commission by Segment (Verified)

Segment Loan Size Broker Points Lender Origination Total to Borrower When Paid
Residential construction (private/HM) <$2M 1-2 pts 2-3 pts 3-5 pts At closing
Residential construction (bank) <$2M 1-2% 0.5-1% 1.5-3% At closing
Small multifamily / townhome (private) 1M−5M 1-1.5 pts 1-2 pts 2-3.5 pts At closing
Commercial construction 5M−15M 0.5-1 pt 1-1.5 pts 1.5-2.5 pts At closing
Commercial construction $15M+ 0.5 pt 0.5-1 pt 1-1.5 pts At closing
ADU / small construction <$350K 2-4 pts 1-2 pts 3-6 pts At closing

Sources: C-Loans | RCN Capital | Private Lender Link | BiggerPockets | ABL Funding YSP Program

Who Pays & When

Who pays: Borrower pays in nearly all private/hard money construction loans. The lender charges its own 2-3 points, and the broker charges a separate 1-2 points. Lender-paid compensation (YSP) is an alternative on conventional/agency deals — lender pays 0.5-2.75% to the broker, borrower gets a higher rate instead of upfront fees.

When paid: Broker fee paid at closing through escrow in virtually all private construction loans. A check is sent directly to the broker at close (confirmed by RCN Capital, Marquee Funding Group, Stormfield Capital). No per-draw compensation model exists — draws pay the builder, not the broker.

Regulatory note: Most investor construction loans (build-to-sell, build-to-rent, spec homes) are business-purpose and exempt from TILA/Reg Z. The 3% QM fee cap does not apply. Only owner-occupied primary residence construction loans are consumer-purpose and subject to CFPB fee caps.

Critical distinction — points on commitment vs. funded: Whether origination points are calculated on the total loan commitment or only the initial funded draw is material. A 2-point fee on a $1M commitment is $20K; on a $300K initial draw it's $6K. Practice varies by lender — clarify in every deal.

Sources: CFPB Reg Z | NerdWallet | FCTD Fee Guide

Comparison to Other Real Estate Products

Product Broker Commission Total Points to Borrower Volume Potential
New construction 1-3 pts 2-6 pts Lowest (longest cycle)
Fix and flip / bridge 1-2 pts 2-4 pts Higher (faster close)
Hard money (acquisition) 1-2 pts 2-4 pts Moderate
DSCR rental 0.5-2 pts 1-3 pts Highest (streamlined)
Conventional refinance 0.5-1.5% 0.5-2% Moderate
SBA 504 0.5-1 pt (referral/CDC) Varies Low (long process)

Construction pays the most per deal but closes the least. DSCR is the volume play. Bridge/fix-and-flip is the middle ground. A brokerage ideally runs all three to balance revenue per deal with deal flow velocity.

Sources: RCN Capital | Lima One

Why Construction Commissions Are Premium

  1. Complexity premium: Construction deals require 3-5x the documentation and coordination of a standard bridge loan. Brokers earn the spread through expertise.
  2. Longer sales cycle: 10-16 weeks from application to close (vs. 1-3 weeks for bridge). More touch points, more risk of deal falling through.
  3. Fewer lenders: The construction lending market is concentrated — fewer lenders means less rate competition and more room for broker points.
  4. Double-dip opportunity: Brokers who place both the construction loan AND the permanent take-out financing earn commissions on both transactions. On a $2M project, this could mean 40K−80K total across both closings.
  5. Up to 4% total via YSP: ABL Funding's Broker Yield Spread Premium Program explicitly advertises "up to 4% between upfront points and yield spread premium."
  6. Repeat business: Builders who complete successful projects become serial borrowers — a single builder relationship can generate 5-15 loans per year.

Key Terms & Metrics

Term Definition Typical Range
LTC (Loan-to-Cost) Loan amount as % of total project cost (land + hard + soft costs) 60-85% (private: 60-75% typical, up to 80-85% for experienced sponsors; bank: 70-80%)
LTV (Loan-to-Value) Loan amount as % of as-completed appraised value 55-80% (80% conventional, 96.5% FHA one-time close)
Interest rate Annual rate on outstanding balance (accrues only on drawn funds) 9-14% (private), 7-8.5% (bank, early 2026), Prime+1-3% (SBA)
Origination points Upfront fee as % of total loan commitment 1-3 pts (private), 0.5-1.5% (bank)
Term Loan duration from closing to maturity 12-24 months (residential), 18-36 months (commercial)
Interest reserve Pre-funded interest held in escrow, drawn monthly Sized to cover full construction period
Retainage % of each draw withheld until project completion 5-10%
Draw fee Per-draw inspection/processing fee 100−500 per draw
Extension fee Fee to extend loan past original maturity 1-2 pts (private), 0.25-0.5 pts (bank) + per-diem interest
Completion guarantee Borrower guarantees project will be finished (personal recourse) Required by most lenders
Contingency reserve Budget buffer for cost overruns 5-15% of budget (5-10% most common)

Sources: CoFi Lending | Stormfield Capital | New Silver | Clearhouse Lending

Sources

Case Studies & Business Impact

Underwriting & Documentation

Process Flow & Draw Administration

Broker Commissions & Fees

Market Context

Regulatory

Research compiled April 2026 by 8 parallel research-and-verification agents. All case studies are sourced from published lender case study pages. Underwriting documentation cross-referenced against OCC regulatory handbooks, bank checklists, and private lender program guides. Commission ranges verified against CFPB data, broker compensation surveys, and lender partner programs. Verifier corrections incorporated: SBA Form 1920 removed (eliminated 2023), completion reserve range corrected to 5-15%, extension fees differentiated by lender type, private LTC range expanded for experienced sponsors, single-close vs. two-close distinction added.