How Ground-Up Construction Loans Actually Work: Draw Schedules, Lot Equity, and What Builders Need to Know

If a bank has ever told you no on a ground-up construction loan, you are not alone. Most banks are not set up to fund dirt. They fund 30-year fixed mortgages against a finished house with two years of tax returns and a strong FICO. That is a different product entirely. A construction lender looks at the build the way a builder looks at the build: the lot, the budget, the comps, and the exit.

Here is how the file actually gets underwritten, what a typical draw schedule looks like, and how to tell whether your project will fund.

What a construction lender actually underwrites

A ground-up construction loan is not a personal loan dressed up in a hard hat. It is collateral-first lending, structured around the build itself. The four things that matter:

1. The lot. Owned free and clear is the strongest position. If the lot carries debt, the loan structure has to absorb the payoff. Lot equity directly reduces how much cash you need to bring to close.
2. The budget. A real line-itemed build budget with a contingency reserve. Round numbers and missing line items are the fastest way to lose credibility. Lenders want hard costs, soft costs, contingency, and a builder fee that survives a scope creep.
3. The comps. Recent closed comparable sales support the projected appraised value at completion. Comps drive the loan-to-completed-value the lender will allow.
4. The exit. Either a refinance into a DSCR rental loan if the home will be held as an investment property, or a sale into the spec market. The exit defines how the lender prices the bridge.

If your file is strong on those four, the borrower’s FICO and tax-return picture matter much less than they would at a bank.

How draw schedules work

This is the part bank borrowers find most foreign. You do not get a giant pile of cash at closing. The lender funds an initial portion at close (for lot payoff and soft costs) and the rest is parked in a controlled funding account that releases on scheduled draws tied to inspections.

A typical draw schedule for a spec home might look like this:

• Draw 1: Site work and foundation. Released after the foundation inspection passes.
• Draw 2: Framing complete and dried in. Released after the framing inspection.
• Draw 3: Mechanical, electrical, plumbing roughed in. Released after rough inspection.
• Draw 4: Drywall, interior finishes underway. Released after the drywall inspection.
• Draw 5: Final completion, certificate of occupancy. Final draw releases on the C of O.

The lender pays interest only on the funded balance, not on the committed amount. That is a huge cash-flow advantage during the build. Your effective cost of capital climbs as the build progresses and more of the loan is funded, which forces a discipline most bank borrowers never feel.

Lot equity and how it changes your stack

If you bought the lot for $90,000 and it appraises today at $130,000, you have $40,000 of equity sitting in the dirt. A construction lender will often credit that equity toward your down position. That is why builders who own lots free and clear can sometimes close a build with very little fresh cash at the closing table.

Compare that to a bank construction-to-perm product, which typically wants a hard cash down payment on top of the lot regardless of how much equity you have built. Different lens, different math, different file.

What a strong file looks like

From a sample we placed recently:

• Lot owned free and clear, basis $90,000.
• Hard build cost: $310,000.
• Soft cost reserve: $25,000.
• Projected appraised value at completion: $585,000.
• Loan to completed value: well inside the lender’s box.
• Exit: sale into the spec market with active comps.

That file got placed with a draw-schedule construction lender and broke ground inside the month. The bank had passed on it twice on borrower-side criteria. Same project, same dirt, different underwriting lens.

Who construction lenders are NOT for

Honest reality check. A ground-up construction loan is not the right tool for:

• A buyer who wants a primary residence and is comfortable in a bank construction-to-perm product.
• A first-time builder with no experience, no lot, and no team in place.
• A project where the comps do not support the appraised value at completion. The math has to work before the lender ever opens the file.

If your project fits the construction lender lens, the conversation is fast. If it does not, no amount of relationship will force the file through.

How to see if your build qualifies

The fastest path is to submit the lot information, the build budget, and the comps so a placement team can pre-screen the file before you spend any more time on it. You can start a construction loan application here. The form is short and the placement team will tell you within a few business days whether the file is in the box and which lender lens is the right match.

Builders and spec developers in Florida, Texas, Georgia, and the Carolinas: apply here if you have a project ready to break ground or you have been told no by a bank on a build that you know is real. Funding is subject to lender approval.

Results not typical. Every project is underwritten on its own facts. This article is for educational purposes only and is not a commitment to lend.

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