What is a New Construction Loan and How Does it Work? #

A new construction loan is short-term financing that covers the cost of building a property from the ground up. It is commonly used by real estate investors who are developing single-family homes, multifamily properties, or other investment projects. Unlike a conventional mortgage, which is based on the value of a completed property, a construction loan is structured around the total cost of the build and the projected value once it is finished (ACV).

Key Features of a New Construction Loan #

• Short-term, usually twelve to eighteen months in length

• Interest-only payments during the construction phase

• Approval based on projected after-completion value, not the current land value

• Funds released in draws tied to construction milestones

• Requires a detailed construction plan and budget

• Designed for investment properties rather than owner-occupied homes

How It Works: #

When a new construction loan is approved, the funds are not released in full at closing. Instead, they are disbursed in draws as the project moves forward. Each draw is tied to a specific stage of the build, such as laying the foundation, completing the framing, or finishing interiors. Before releasing funds, the lender will confirm progress with an inspection. This system ensures money is allocated properly and keeps the project aligned with the approved budget and timeline.

At the end of the loan term, investors typically refinance into a long-term product or sell the property to repay the loan. This structure provides flexibility and makes construction loans a useful tool for scaling real estate portfolios.

Why Investors Choose Construction Loans #

Investors use construction loans because they provide speed, flexibility, and capital efficiency. Funding is often faster than conventional financing, which allows projects to start without delay. The draw system supports cash flow by releasing funds as needed, while refinancing or selling at completion gives investors multiple options for repayment.

Summary #

A new construction loan is a short-term solution that finances ground-up development projects. With staged draws, interest-only payments, and approval based on projected value, it gives investors the flexibility to complete projects and scale their portfolios efficiently.