Guide · Financing

Construction loans and financing a build

The short answer

A construction loan funds a build in stages, releasing money as milestones are hit rather than all at once. Your lender is a silent partner covering 80% to 90% of the cost, and on-draw interest means you only pay interest on money actually deployed. The draw schedule and terms matter more than the headline rate.

Watch it happen

How to Get a Construction Loan for Real Estate Development in 2026 →

How a construction loan actually works

A construction loan is not a lump sum. The lender releases money in draws, tied to stages of the build being completed and inspected. That protects the lender and it protects you from paying for work that has not happened.

Think of the lender as a silent partner. They provide 80% to 90% of the capital, and because interest is charged only on drawn funds, your carrying cost stays low in the early months when little has been deployed.

Where financing quietly costs developers money

The expensive mistakes are rarely the interest rate. They are misreading the draw schedule, underestimating the interest reserve, and accepting a weak term sheet without negotiating.

Read the terms the way you would read a deal: line by line. The structure of the loan can make or break a project's margin long after the rate stops mattering.

Your financing checklist

0/7 done

Common questions about financing

How does a construction loan work?

It is not a lump sum. The lender releases money in draws tied to stages of the build being completed and inspected. That protects the lender and keeps you from paying for work that has not happened. Interest is charged only on drawn funds, so early carrying cost stays low.

How much of a construction loan is the down payment?

A construction lender typically covers 80% to 90% of the cost as a silent partner, so your equity is the remainder. On an owner-occupied build the down payment can be as low as 5%. The exact figure depends on the lender and whether the project is owner-occupied or investment.

What is on-draw interest?

It means you pay interest only on the money actually released, not the full loan amount. Because funds come in draws as milestones are hit, your carrying cost stays low in the early months when little has been deployed. It is why loan structure matters more than the headline rate.

What is the biggest financing mistake developers make?

Focusing on the interest rate and ignoring the structure. The expensive mistakes are misreading the draw schedule, underestimating the interest reserve, and accepting a weak term sheet without negotiating. Read the loan the way you would read a deal, line by line.

Watch and go deeper