New construction loans have a fundamentally different loan structure than traditional mortgages. Rather than receiving a lump sum at closing and repaying it over decades, borrowers access funds incrementally as the project progresses and typically repay the full balance upon completion. Understanding these structural differences helps investors plan financing before breaking ground.
How Funds Are Disbursed #
With a traditional mortgage, the lender sends the full loan amount to the closing table at once. With a new construction loan, lenders release funds in stages called draws, tied directly to verified construction milestones. Consequently, the full loan balance is never outstanding all at once during the build phase.
Interest Payments During Construction #
Traditional mortgages require full principal and interest payments from day one. Construction loans, however, carry an interest-only structure during the build period. Borrowers pay interest only on the funds they have drawn, not the full loan amount. This means monthly costs typically start low and increase as borrowers take more draws.
For example, if a borrower has a $500,000 construction loan but has only drawn $150,000 so far, interest accrues only on the $150,000 outstanding balance. As a result, carrying costs stay manageable early in the project.
Loan Term Length #
Traditional mortgages commonly run 15 to 30 years. New construction loans are short-term by design. AHL offers terms of 12 to 18 months on an interest-only basis, which gives borrowers enough time to complete construction and execute their exit strategy before the loan matures.
How the Loan Is Repaid #
At maturity, construction loans do not convert to long-term financing automatically in most cases. Instead, borrowers repay the balance through a sale, a refinance into a DSCR or conventional loan, or a one-time close product that handles both phases. AHL does offer a one-time close build-to-rent option, which eliminates the need for a separate refinance after construction.
Documentation and Underwriting Differences #
Traditional mortgage underwriting focuses heavily on borrower income, tax returns, and debt-to-income ratios. New construction loans, in contrast, place more emphasis on the project scope, the borrower’s build experience, contractor qualifications, the budget, and the projected after-construction value. As a result, investors with strong projects can often qualify even when their income documentation would not satisfy a traditional lender.
Summary #
New construction loans differ from traditional mortgages in nearly every structural way. Lenders distribute funds in stages rather than all at once. Payments cover interest only on the outstanding balance during the build. Terms run 12 to 18 months rather than decades. Repayment typically comes from a sale or refinance at completion. These structural features are specifically designed for the timeline and cash flow demands of a construction project rather than a long-term hold.