A residential construction loan is short-term financing that pays for building a home, released in stages (draws) as each phase of work is completed and verified. For builders and developers, residential construction financing covers spec and presold homes and is repaid when the home sells or is refinanced, not over 30 years like a mortgage.
Key Takeaways:
- Paid in draws: Funds are released phase by phase after each stage is inspected, not in one lump sum.
- Interest on what you use: Interest usually accrues only on the amount drawn so far.
- Sized to the project: Lenders size the loan against project cost and finished value, and the builder brings the rest as equity.
- Qualifying depends on the project: Lenders look at the builder's track record, budget and exit plan more than personal income.
Who are Residential Construction Loans For?
Residential construction loans come in two forms. Builder construction loans go to businesses building spec or presold homes, often several at once. Homeowner construction loans go to individuals building one home to live in, and usually convert to a mortgage when the house is finished.
How Is a Construction Loan Different from a Mortgage?
A construction loan funds a build in stages; a mortgage buys a finished home in one payment.
How Do Construction Loan Draws Work Funds?
- The builder completes a phase in the draw schedule (for example, foundation or framing).
- The builder submits a draw request.
- An inspector confirms the work is in place.
- The lender releases funds for that phase.
For timelines and paperwork, see our guide to the construction loan draw process.
How are Residential Construction Loans Sized and Repaid?
Loans are Sized to Project Cost and Finished Value
Lenders size builder loans against total project cost (loan to cost, LTC) and the finished value (loan to value, LTV), and the builder funds the rest as equity.
Repayment Comes From the Home Sale or a Refinance
The loan is repaid when the home sells (spec) or closes with the buyer (presold), or through a refinance or bridge loan if the home hasn't sold at completion.
Who Qualifies for a Residential Construction Loan?
Builder lenders often look at the project and the builder more than personal income.
- A track record of completed builds
- Plans, permits and a line-item budget with a construction contingency
- Equity in the project
- A clear exit plan for the finished home
How Does Builders Capital's Process Compare to a Bank Construction Loan?
Builders Capital is a private lender, which means our borrowers are business entities rather than individual homeowners financing their own residence. Banks typically serve both. Our underwriting and draw process is built around builder timelines rather than retail mortgage timelines.
- Builders Capital is a private construction lender for large scale builders and developers, headquartered in Puyallup, Washington.
- Products: ground-up construction loans, AD&C loans, build-to-rent loans and bridge loans. For which loan fits which project, see types of construction loans.
- Capital model: Annual exposure limit that qualifies the builder and business, not just the project
- Get started today by contacting our team
FAQs About Residential Construction Loans
Do builder construction loans require a personal guarantee?
Many builder loans are recourse and require a personal guarantee from the owners, though terms vary by lender and project.
Can a construction loan cover the cost of land?
Some can: acquisition, development and construction loans finance the land, site work and build together, while a ground-up loan usually assumes the lot is already owned.
What happens if a construction project goes over budget?
The builder usually covers the gap with additional equity once the contingency is used up, since the lender funds against the approved budget.
