9 Questions to Ask Your Lender About Ground Up Construction Financing

Securing ground up construction financing is a big step—whether you're building a custom home, a multifamily
development, or a commercial structure. Unlike traditional mortgages, construction loans are complex, require more
documentation, and carry unique risks for both lender and borrower. That’s why asking the right questions upfront is
critical.

Before you break ground, sit down with your lender and get clear answers to these nine essential questions. It could
save you from unexpected costs, delays, and headaches down the road.

1. What Type of Construction Loan Do You Offer?
Not all lenders offer the same loan structure. Some only offer short-term financing that covers the construction phase,
requiring you to refinance once the project is complete. Others provide a one-time close loan, which converts
automatically into a permanent mortgage after construction wraps up.

Understanding the structure of your ground up construction loan helps you plan long-term—especially if interest rates
are fluctuating or if you’re unsure whether you’ll hold or sell the property.

2. What Are the Down Payment Requirements?

Ground up construction loans typically require a higher down payment than conventional mortgages. Lenders want to
see that you have skin in the game. Depending on the type of project and your financial profile, down payments can
range from 15% to 30%.

Ask for a clear breakdown of what qualifies toward that down payment. Some lenders may count land equity or pre-paid
costs; others may not.

3. How Is the Loan Disbursed?

Unlike a lump-sum loan, construction financing is paid out in draws. Each draw corresponds to a completed phase of
construction—foundation, framing, roofing, etc.

Make sure you understand:

       How many draws are allowed

       The timeline for releasing funds

       What inspections or documentation are required before each draw

This will help you manage contractor payments and avoid delays on-site.

4. What Interest Rate and Terms Can I Expect?

Ground up construction loans usually come with variable interest rates tied to the prime rate or SOFR (Secured
Overnight Financing Rate). Ask what rate index the lender uses, and what margin is added to calculate your rate.

Also clarify how long the construction phase lasts and what happens if the project isn’t complete by then. Some lenders
offer extensions, but often with fees.

5. Will I Make Payments During Construction?

Many borrowers assume they won’t have to make payments while the building is going up—but that’s not always true.
Most construction loans require interest-only payments during the build, based on the drawn balance.

Ask:

       When your payments start

       Whether interest reserves are included in the loan

       If you can defer payments until completion

This can have a huge impact on your cash flow during the construction phase.

6. What Documentation Do You Require?

Be ready to provide detailed plans, a fixed budget, builder contracts, permits, and possibly architectural drawings.
Some lenders also require a licensed contractor to be involved, and they may want to vet the builder before approval.

Asking this early helps you get organized and avoids a scramble later in the process.

7. What Happens If the Budget Changes Mid-Project?

Construction budgets rarely go exactly as planned. Materials spike. Change orders happen. Unforeseen site issues can
arise. Find out how your lender handles overages and whether you’ll need to come up with extra funds or if there's a

built-in contingency.

Lenders often require a 5–10% contingency reserve as part of the loan. If they don’t, you’ll want to include one in your
own budget anyway.

8. What Are the Builder Requirements?
Some lenders require borrowers to use licensed, bonded contractors or builders with a track record of similar projects.
If you’re considering self-build or hiring a less experienced crew, check if that will disqualify you.

You should also ask:

     Does the lender inspect the builder’s work?

     Will the lender need copies of the construction contract?

     Are there any disbursement restrictions tied to performance?

Choosing the right builder is crucial—not just for the quality of your project, but also for maintaining financing
approval.

9. What’s the Timeline for Approval and Closing?

Ground up construction financing takes longer to process than a regular mortgage. Lenders need time to review plans,
budgets, and builder credentials. Appraisals are based on projected value, which adds another layer of complexity.

Ask for a realistic timeline:

     How long for conditional approval?

     How long after that until closing?

     Can they lock in your rate?

This helps you set expectations with your contractors and plan your project start date accurately.

Final Thoughts
Ground up construction loans are powerful tools, but they’re not plug-and-play. Each lender handles things a little
differently, and the fine print can make or break your project. The more prepared you are—and the more you ask the
right questions—the smoother the process will go.

Don’t rush through the loan conversation. Treat it like a strategic partnership. A good lender will not only fund your
build but help you succeed from the first shovel to the final inspection.