Capital that funds the build from land through certificate of occupancy.
A ground-up construction loan is a short-term real estate loan that funds the construction of a new building from land acquisition through certificate of occupancy. Unlike a conventional mortgage, construction loans fund in stages — called draws — as work is completed and verified, rather than as a single advance at closing.
A ground-up construction loan is built around a budget, a draw schedule, and a completion date. At closing, the lender funds land acquisition (or releases land already owned) and an initial advance for permits, site work, and mobilization. As construction progresses, the borrower submits draw requests showing what work has been completed; the lender (or a third-party inspector) verifies the work and releases funds against the budget line items.
Construction loans are sized in Loan-to-Cost (LTC) rather than LTV because the asset doesn't exist yet. Typical LTC is 70–85% of total project cost — land, hard costs, and soft costs combined. The borrower's equity funds the gap and goes in first, before any loan funds are released.
Most construction loans are interest-only during construction, with interest typically paid from a built-in interest reserve so the borrower isn't out-of-pocket on payments during the build. At certificate of occupancy or the loan's maturity (typically 12–24 months), the loan needs to be paid off — either through sale of the property, refinance into a permanent loan (DSCR for rentals, agency for multifamily, perm for commercial), or a planned takeout from an end loan.
For builders, the keys to a smooth construction loan are a clean, detailed budget, a realistic schedule, and a GC with verifiable experience on similar projects. The most common reasons loans don't close are inflated budgets, missing soft cost detail, and borrowers without a track record of completing similar builds. Lenders aren't trying to be obstacles — they just need to know the loan will get paid back on time.
| Land (already owned, contributed as equity) | $85,000 |
| Hard costs (3-bed/2-bath, 1,950 sqft @ $185/sqft) | $360,750 |
| Soft costs (architect, permits, engineering) | $28,000 |
| Interest reserve (12 months projected) | $22,500 |
| Contingency (5% of hard costs) | $18,038 |
| Total project cost | $514,288 |
| Construction loan: 80% LTC | $411,430 |
| Borrower equity (land + cash) | $102,858 |
| Projected sale price at completion | $615,000 |
| Projected gross profit | ~$100,712 |
A mortgage funds a single advance at closing on a property that already exists. A construction loan funds in stages as new work is completed and verified. Construction loans are also short-term (12–24 months) and almost always interest-only, while mortgages are typically 15–30 years and amortizing.
The lender and borrower agree on a draw schedule at closing — typically 4–8 milestones tied to specific work completion (e.g., foundation poured, framing complete, drywall, finishes, CO). The borrower submits a draw request when a milestone is hit; the lender inspects, then releases funds against the budgeted amount for that milestone.
Most lenders require either the borrower or the contractor to have completed at least 2–3 similar projects. First-time builders without a track record can sometimes get a construction loan by partnering with an experienced GC who carries the build risk — but the lender will underwrite the GC closely.
It has to be repaid — through sale (spec construction) or refinance into a permanent loan (build-to-hold). On commercial and multifamily, the loan often has a planned takeout commitment from a permanent lender at maturity, so the construction loan rolls directly into perm debt.
A portion of the loan that's held back to pay interest during construction. Because the property produces no income during the build, the borrower would otherwise have to pay interest out-of-pocket each month. The reserve funds those payments instead, smoothing cash flow during construction.
Matrix funds ground-up spec, build-to-hold, and small multifamily construction at the highest LTC the deal supports. Real draw management. Underwriting that respects builder expertise.
