How Does a Construction Loan Work? A Builder's Guide to Financing Your Project
If you've never built before, the first question you'll ask a lender is usually the simplest one: how does a construction loan work? The short answer is that it's nothing like the mortgage you'd use to buy an existing house — it pays out in stages as the work gets done, charges interest only on the money you've actually drawn, and requires a different cast of characters to keep everything on track.
What makes a construction loan different from a regular mortgage
A traditional mortgage is secured by a finished, appraised asset. A construction loan, by contrast, finances something that doesn't exist yet — secured by a combination of the land, the plans, and the projected value of the finished property. Because of that uncertainty, construction loans are structured as short-term financing rather than 15- or 30-year terms, and the lender is really underwriting three things at once: the borrower's plan and budget, the builder's ability to execute it, and the property's likely value once complete.
Most construction loans are also interest-only during the build, either paying off at completion (common with fix-and-flip and spec building) or converting into permanent financing (common with buy-and-hold rental properties, which are often refinanced into a DSCR loan).
How draws actually work.
This is the part first-time borrowers find most surprising: you don't get the full loan amount on day one. A typical New Construction draw schedule might look something like this:
Why you only pay interest on funds drawn
Say you're approved for a $600,000 New Construction loan. If you've only drawn $150,000 so far, you're only paying interest on that $150,000 — not the full commitment. As each draw goes out, your interest-only payment adjusts upward to reflect the new outstanding balance, which is why the pace of your draws directly affects your holding costs.
The key parties in a construction loan.
A construction loan involves more moving parts than a purchase mortgage. Knowing each party's role helps you understand where delays — or savings — typically come from.
A realistic construction loan timeline.
Application & underwriting
Submit plans, budget, contractor information, and site details. BldFi typically issues approvals within 24–48 hours.
Closing
Title work, loan documents, and initial funding. BldFi generally closes in 10–14 days versus 30+ for a traditional bank.
Construction phase
Draws are requested and released as milestones are completed and verified, typically over 6–18 months.
Final inspection & CO
The local building department signs off that the structure is safe and code-compliant.
Payoff or conversion
The loan is paid off via sale or refinance, or converted into permanent financing.
Delays most often happen at the permitting stage, during inspections that fail on the first pass, or when draw paperwork is incomplete.
What lenders look for
- A detailed budget and scope of work, often broken down line-item by trade
- Site control (ownership or a purchase contract on the land)
- Plans and permits, or evidence they're in process
- The builder's or GC's track record and licensing
- Your equity or cash contribution into the project
- An exit strategy — sale, refinance, or long-term hold
Loan-to-cost, or LTC — the percentage of total project cost the lender will finance — is one of the key numbers here. The New Construction program available through BldFi finances up to 90% LTC on loans from $250,000 to $5 million, which means less of your own capital tied up in the build.
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