Construction Loan Requirements: What Developers Need to Qualify

Securing a construction loan is one of the most critical steps in any ground-up development project. Unlike permanent financing for stabilized properties, construction loans require lenders to underwrite not just the borrower and the asset, but also the execution risk of building something that doesn't yet exist.

Understanding what lenders require—and preparing your application accordingly—can significantly improve your chances of approval, your terms, and your speed to closing.

This guide covers the core construction loan requirements for commercial real estate projects, what documentation you'll need, and how to position your deal for success.

How Construction Loans Differ from Permanent Financing

Construction loans are short-term, typically 12 to 36 months, designed to fund the building phase of a project. Once construction is complete and the property is stabilized (leased up or generating income), borrowers refinance into permanent debt or sell.

Because lenders are financing a project that doesn't yet produce income—and may not be completed as planned—construction loans carry more risk than traditional mortgages. This risk is reflected in stricter qualification requirements, higher rates, and more intensive oversight during the loan term.

Key structural differences include:

• Draw schedule funding: Rather than receiving the full loan amount at closing, construction loans fund in stages as work is completed and inspected.
• Interest reserve: Many construction loans include a reserve account to cover interest payments during construction.
• Recourse: Most construction loans require personal guarantees from the principals.
• Monitoring and inspections: Lenders typically require third-party inspections before each draw.

Core Construction Loan Requirements

1. Borrower Experience and Track Record

Construction lenders place significant weight on the borrower's development experience. Ideally, sponsors can demonstrate successful completion of similar projects—same asset type, comparable size, and within the same market or region.

First-time developers aren't automatically disqualified, but they'll often need to partner with an experienced co-sponsor, bring a well-credentialed general contractor, or offer additional credit enhancements to offset the perceived risk.

2. Credit and Financial Strength

Lenders evaluate the personal credit profiles and net worth of the principals. Because most construction loans are recourse, guarantors typically need:

• Strong personal credit scores (680+ minimum, 720+ preferred)
• Net worth equal to or greater than the loan amount
• Liquidity (post-close cash reserves) equal to 10–20% of the loan

Lenders may also review the borrower's existing debt exposure, pending guarantees, and prior bankruptcy or foreclosure history.

3. Equity and Down Payment

Construction loans typically require 20–35% borrower equity, depending on the asset class and risk profile. Lenders calculate loan-to-cost (LTC) rather than loan-to-value (LTV), since the property isn't yet completed.

Equity can come from cash, land contribution, or third-party investors. Some lenders allow mezzanine debt or preferred equity to fill the capital stack, though senior lenders will cap the total leverage and require intercreditor agreements.

4. Detailed Project Plan and Budget

Lenders will scrutinize the project's construction budget, timeline, and feasibility. This includes:

• Itemized hard costs (site work, vertical construction, finishes)
• Soft costs (architecture, engineering, permits, legal, insurance)
• Contingency reserves (typically 5–10% of hard costs)
• Construction timeline with key milestones

Budgets should be prepared by the general contractor or construction manager and reviewed by the borrower's project team. Lenders often hire third-party cost consultants to validate the numbers.

5. Permits and Entitlements

Before funding, most construction lenders require that the project is fully entitled and permitted—or that permits are imminent and conditions are clearly understood.

This includes zoning approval, site plan approval, environmental clearances, and building permits. Projects still in the entitlement phase may qualify for land loans or predevelopment financing, but not full construction loans.

6. Exit Strategy

Every construction loan requires a clear exit plan: how will the borrower repay the loan once the building is complete?

Common exit strategies include:

• Refinancing into permanent debt (agency, CMBS, bank, or life company)
• Sale of the stabilized asset
• Condo or unit sales (for for-sale residential projects)

Lenders will assess the feasibility of the exit based on market conditions, projected NOI, and comparable transactions.

7. Appraisal and Feasibility

A construction loan appraisal includes both an "as-is" value (current land or site value) and an "as-completed" value (projected value upon stabilization). Lenders use these figures to determine LTV and LTC constraints.

Some lenders also require a market feasibility study or absorption analysis, especially for larger projects or untested submarkets.

Documentation Checklist

When applying for a construction loan, be prepared to provide:

• Personal financial statements and tax returns (2–3 years)
• Entity formation documents (operating agreements, articles of organization)
• Sponsor resume / track record of prior projects
• Project pro forma (development budget, rent roll projections, stabilized NOI)
• Construction contract (GMP or cost-plus) with licensed GC
• Architectural drawings and specifications
• Permits or permit status update
• Phase I environmental report
• Title commitment and survey
• Insurance certificates (builder's risk, general liability)

Construction Loan Types and Sources

Construction financing is available from multiple lender types, each with different risk appetites and terms:

• Regional and community banks: Often the most active construction lenders for small-to-midsize projects. Relationship-driven and flexible on structure.
• National banks: Typically focused on larger deals ($20M+) with experienced sponsors and institutional-quality projects.
• Debt funds and private lenders: Higher cost of capital, but more flexible on borrower experience, leverage, and asset type. Faster execution.
• Credit unions: May offer competitive terms for smaller residential or mixed-use projects in their geographic footprint.
• SBA 504 loans: For owner-occupied commercial projects, SBA construction loans offer favorable terms with longer amortization.

How to Improve Your Approval Odds

• Bring a strong team: An experienced GC, architect, and project manager reduce execution risk in the lender's eyes.
• Have your documentation ready: Incomplete packages slow down underwriting and create doubt.
• Know your numbers: Be able to walk through your budget, timeline, and pro forma with confidence.
• Be realistic on costs: Understating budgets or timelines will backfire when the lender's cost consultant reviews the deal.
• Show skin in the game: Lenders want to see meaningful borrower equity—not 100% third-party capital.
• Work with an advisor: A capital advisor familiar with construction lending can help package your deal, identify the right lenders, and negotiate better terms.

Brookmont Capital Ventures is a capital advisory firm. We do not provide direct lending services. All financing is subject to lender approval and underwriting.