Ground-up construction
New Construction Loans
Land and vertical, financed in stages. Some programs convert straight into permanent financing at completion instead of making you refinance.
Building is the highest-margin thing an investor can do and the easiest to get wrong. Money comes out in stages, timelines slip, and the exit is a year or more away in a market nobody can forecast.
The financing reflects that. Construction lenders underwrite you, the builder, the budget and the schedule, and they release money only as the work actually gets done.
How it works
Before closing: the lender approves your plans, your budget, your schedule and your builder. Land goes in at the front if you are acquiring it.
During the build: you draw against the budget in stages. Each draw is inspected. Work that has not been done does not get paid for.
At completion: you sell, you refinance into permanent financing, or if you are on a one-time-close structure, the loan modifies into its long-term form.
Terms are short and interest-only during construction, in line with other short-term investor paper. Bridge loans covers the mechanics that are shared between them, including the default rate and extension costs.
The one-time close, and its catch
A construction-to-permanent structure originates under short-term underwriting and then converts to long-term financing at completion, rather than you running a separate refinance.
The saving is real: one set of closing costs instead of two, and no scramble at the end to find a lender.
The catch is that conversion is not automatic. You requalify at modification. That normally includes a soft credit pull confirming there were no mortgage delinquencies or credit events during the build. If your credit takes a hit while you are pouring concrete, the exit you were counting on can move.
Plan your build as if you will have to qualify again at the end, because you will.
What makes a construction file get approved
Experience. Lenders treat a first ground-up project very differently from a fifth. If this is your first, expect tighter leverage and more attention on your builder's track record than on yours.
A builder the lender will accept. Licensing, insurance, and a history of finishing. Your brother-in-law with a truck is a problem.
A budget with contingency in it. Projects that run out of money halfway are the single most common failure. A contingency reserve is usually required, and you should want one.
An exit that survives being late. Ask yourself what happens if you finish six months behind. If the answer is "the deal stops working," the deal was too thin.
Where this fits in Orange County
Full ground-up subdivisions are not the common OC investor play. What is common:
- Tearing down and rebuilding on an established lot, where land value is most of the price.
- Building an accessory dwelling unit, which is a different and often better-suited product. ADU financing in Orange County.
- Infill on a split lot under California's newer lot-split rules.
If your project is an ADU, start with the ADU page. You may not need construction paper at all.
Related
- Fix and flip loans when the structure already exists
- Bridge loans for short-term capital with little or no work
- All investor loans
Questions people ask
Can the loan include buying the land?
Often yes. Ground-up programs are designed to finance construction of a new dwelling from the ground up, including land acquisition where it applies. How much of the land cost is financed depends on the program and the deal.
What is a one-time close?
The loan starts under short-term construction underwriting and then modifies into long-term financing when the project is finished, instead of you doing a separate refinance. It saves a second set of closing costs.
Is the conversion to permanent financing automatic?
No. You requalify at the time of modification. That normally includes a soft credit pull confirming no mortgage delinquencies or credit events happened during construction. Do not treat it as guaranteed.
Can I live in the house I build with this loan?
Not on an investor program. These are business-purpose loans and you cannot occupy the property during the loan term. A construction loan for a home you intend to live in is a separate conversation.
How are funds released?
In stages against your budget and schedule, with inspections confirming the work before each draw. The budget, the plans and the builder are approved before closing.