What Is a Ground-Up Construction Loan?

A ground-up construction loan provides short-term financing for real estate investors and other borrowers who are interested in building a new property from the ground up. Borrowers can use this type of loan to finance either construction only or both the land purchase and the subsequent construction project.

Ground-up construction financing is more complex than traditional financing for an existing property. Since there’s no standing building, you’ll need to rely on detailed plans and projections instead. Borrowers who want to secure a ground-up construction loan must develop a comprehensive plan for the project. This plan must include many things, such as the following:

The loan only offers a limited sum of money upfront and provides subsequent payouts as you meet key milestones in the project’s construction. These payouts don’t go directly to the borrower. Instead, the lender submits direct payments to the builder and other professionals who are working on the construction.

The first construction draw typically funds the purchase of the property and initial expenses, including permits. Certain events will trigger the project’s subsequent construction draws throughout the process.