What is a ground up construction loan, and how does it work for investors?

What is a ground up construction loan?

A ground up construction loan finances a building that does not exist yet. The lender commits against plans, a budget and a builder, and the collateral grows as the work does: at closing it is a lot, and a year later it is a finished house.

For an investor the loan is short, interest-only and not meant to be kept. Published programs commonly run 12 to 24 months. The loan ends when the finished property sells, or when a long-term rental loan pays it off.

Lenders describe three common plans: build to sell, often called a spec house; build to rent and hold; and build to rent, then refinance to take equity back out. The plan is the repayment, and the lender underwrites it that way.

Construction loan for investment property versus a homeowner’s construction loan

The construction loan most homeowners hear about is a construction-to-permanent loan: one closing, interest-only payments during the build, then conversion into a long-term mortgage, often 30 years. Published bank and credit union programs of that kind are limited to a primary residence or second home. The FHA handbook states plainly that investment properties are not eligible for FHA insurance.

An investor’s loan is business purpose credit, which Regulation Z exempts from its consumer rules; the regulation’s commentary deems credit to acquire, improve or maintain rental property the owner does not live in to be business purpose. The project, not your paycheck, carries the file.

What does a ground up construction loan pay for?

A construction loan is easiest to read as a list of uses, each with its own advance rate. Published investor programs fund the four below, and usually leave out title and closing costs, points, and the reserves a lender wants you to keep after closing.

Some programs finance their own origination fee. Budget everything outside the four uses as cash.

• Land, or the payoff of a land loan. Published programs commonly advance 60 to 75 percent of the lower of the land’s value or its price, so the rest of the land is usually where your cash goes first.
• Hard costs: site work, foundation, framing, systems, finishes, labor and materials. Many programs fund up to 100 percent of the hard cost budget, released in draws.
• Soft costs: plans, engineering, permit and impact fees, survey, insurance. Some programs finance plans, design fees and permits; others leave them to you.
• Interest reserve: part of the loan set aside to pay the monthly interest during the build. It is borrowed money and accrues interest like the rest.

How the money moves from closing to completion

At closing, the land portion funds: the purchase price, or the payoff of an existing land loan. The construction money does not. It sits in a holdback and is released in draws once an inspector confirms the work is in place.

In most published investor programs, interest is charged only on what has been drawn, so the monthly cost starts small and grows as the frame goes up. A sale or a refinance repays the loan in one payment at the end.

So a construction loan is never all cash on day one. Budget for you or your builder to carry some work ahead of each draw.

Construction loan requirements: the project file

A ground up lender is underwriting a building, so the project file carries more weight than the borrower file. Published investor programs and bank pages ask for the same core set.

• Plans and specifications. Some lenders will not lend at all without a plan set.
• Permits, or a near date for them. Lenders disagree: some fund only once the permit issues, others close a permit-ready file for an experienced builder and advance less on the land until it does.
• A line-item budget with a contingency line, detailed enough that a draw schedule can be built from it.
• A licensed, insured general contractor and a signed contract that states a price and a schedule.
• Usually an appraisal on the plans, giving the land’s value today and the finished value.
• Builder’s risk insurance in place at closing with the lender named as loss payee, plus the builder’s general liability policy.
• A written exit: a sale backed by comparable new home sales, or a rental refinance the rents can carry.

Requirements for a construction loan: the borrower

The borrower side is lighter than a mortgage file and strict in different places. Several investor programs do not verify income or employment. They look hard at experience, cash and credit instead.

• Experience. Many programs want at least one completed ground up project, and the best terms commonly go to borrowers with three or more. At some lenders, renovation experience does not count toward it.
• A first build. Some lenders accept a first-time builder who brings in an experienced licensed contractor, at times as a member of the borrowing entity.
• Credit. Published minimums run from about 620 to 680, and 680 is the most common floor.
• Cash for the equity, the closing costs and reserves after closing. Lenders weigh liquidity alongside credit.
• An entity. Investor programs commonly lend to an LLC or other business entity.

How much ground up construction financing can you get?

Published 2026 programs from private investor lenders cluster tightly. Four numbers describe most of them.

The loan is the lowest of the limits below, never the highest. A program advertised at 90 percent of cost lends less when 70 percent of the finished value is the smaller figure. Banks work under a ceiling of their own: federal supervisory guidelines set 85 percent of value as the limit for a 1 to 4 family residential construction loan, and each bank’s internal limit sits at or under it.

• Loan to cost: commonly up to 85 percent of total project cost, and up to 90 percent at some lenders for experienced builders or stronger credit.
• Loan to after-completed value: commonly capped between 65 and 75 percent, with 70 percent the most frequent figure.
• Land: 60 to 75 percent of the lower of value or price, and sometimes less while the permit is outstanding.
• Construction: up to 100 percent of the hard cost budget, inside the overall caps.

How much is a construction loan?

The price has three parts: rate, points and fees. The rate applies only to what you have drawn, so the schedule matters as much as the rate.

Take a 375,000 loan at 10 percent for 12 months. Say 75,000 funds at closing for the land and the 300,000 construction budget draws evenly over ten months. Interest on the drawn balance comes to about 23,750 for the year, against 37,500 if the full amount had been out from day one. Two points add 7,500, so the loan costs roughly 31,000 before fees, title and insurance.

Every month the build runs past plan adds about 3,100 of interest once the loan is fully drawn. Finishing two months late costs about 6,250, more than a full point of rate would have saved over the whole year on this schedule.

• Rate. Published 2026 starting rates for investor ground up loans run from about 9 to 11 percent, and ranges that publish an upper end stop around 11 to 12. Starting rates are the lowest offered; experience, credit, cash and leverage set where a file lands.
• Points. Commonly 1 to 2 points at origination, and some lenders start at 2.
• Fees. A document or processing fee, a fee for each draw inspection, and possibly an extension fee if the build outlasts the term.

New construction loan down payment: how much cash do you need?

For a homeowner, program rules set it. FHA requires at least 3.5 percent of the adjusted value; VA requires none for an eligible veteran when the price does not exceed the appraised value; published bank and credit union construction-to-permanent programs commonly ask 10 to 25 percent. None of them is open to a house you plan to sell or rent.

For an investor, the down payment is the gap between total cost and the loan. At 85 percent of cost, that is 15 percent of everything: land, hard costs, soft costs and reserve. Closing costs and points come on top.

Bank construction lending to investors asks for more. Published figures disagree, from 20 to 30 percent of cost on one bank’s page to 35 to 40 percent in one investor lender’s comparison, but every figure sits above the private market’s 10 to 15.

A worked example: land at 100,000, hard costs of 320,000, soft costs of 30,000 and a 25,000 interest reserve make a 475,000 project. At 85 percent of cost the loan is 403,750 and your equity is 71,250. If the finished house appraises at 600,000, 70 percent of that is 420,000, so cost is the binding limit. Two points add about 8,000, so you need roughly 79,000 plus title and closing costs before counting your reserves.

How land you already own counts toward a construction loan

If you own the lot, its equity usually stands in for cash. Three questions decide how much it is worth to the lender.

The first is value against cost, and rule writers draw that line by time owned. FHA counts land owned more than six months at its appraised value, and land owned six months or less at the lower of cost and appraised value; federal bank guidelines define value on a purchase as the lesser of acquisition cost and estimated value. Private programs vary, and some size the land on the lower of price and value, so a lot bought cheaply last month may not get full credit for its appraisal.

The second is any loan still on the lot. The payoff comes out of the land advance at closing, and anything above that advance is cash you bring even though you own the land.

The third is cash back. Some programs reimburse part of what you paid for a lot bought with cash, up to their land advance; others leave the equity in the deal. Ask which before you count the lot as your closing costs too.

Hard money construction loans versus a bank construction loan

Hard money is the common name for private, asset-based lending. For construction it means a lender that sizes the loan on the project and the exit rather than on your personal income.

A bank may price below private money. It typically also wants documented personal income, a debt ratio inside its limit, and more equity. For a builder whose tax returns show steady income and who has time, that is cheaper money.

For a builder with a lot under contract and a permit in review, the private loan is often the one that closes in time. Compare total cost over the whole build, including the months each option takes to close.

What is different about a construction loan in Florida?

The loan works the same way in Florida. A handful of state rules change the file and the closing statement.

• Who can build it. The owner-builder exemption in section 489.103(7), Florida Statutes, covers one and two family homes for the owner’s own use, not offered for sale or lease; a sale or lease within a year of completion creates a presumption the house was built for sale. An investor building to sell or rent should plan on a licensed contractor.
• Notice of commencement. Under section 713.13 the owner records it before work starts, and it names the construction lender. It is void if work does not begin within 90 days. On a direct contract over 5,000 dollars, a copy must be filed with the permitting office before the first inspection (section 713.135).
• Taxes on each advance. Florida charges documentary stamp tax of 35 cents per 100 dollars on recorded mortgage debt (section 201.08(1)(b)) and a nonrecurring intangible tax of 2 mills (section 199.133). Under a mortgage securing future advances, both are paid at recording on the initial amount and again on each advance (sections 201.08(1)(b) and 199.143), about 2,060 in total on a 375,000 loan.
• Impact fees. Local governments may not require payment before the building permit issues (section 163.31801(4)(e)), so budget them at permit, not at the land closing. Amounts vary by county.

What to do next if you are planning a build

The order of the work matters more than its speed. A lender cannot size a build that has no budget, and a budget means little without a finished value behind it.

If the lot is still to be bought, the land loan and the construction loan belong in one plan. Entrusted Capital, a direct private lender to investors in Florida, funds land loans with its own capital and places ground up construction loans with institutional lenders.

• Price the finished house first, from recent sales of comparable new homes or, if you will hold it, from local rents.
• Get a line-item budget from a licensed builder, with a contingency line, before you choose a lender.
• Write the sources and uses: land, hard costs, soft costs, interest reserve, closing costs. Apply 85 percent of cost and 70 percent of finished value, and take the lower.
• Start the plans and permit clock now. It is often the longest item, and no lender can shorten it.
• If you will hold the house, talk to the rental lender who will refinance it before you break ground.
• Ask each construction lender the same questions: its land advance, which limit binds your file, the rate on the drawn balance, the points, and how draws are released.