Building from scratch is one of the most rewarding yet complex ways to invest in real estate. Unlike purchasing an existing property, new construction requires careful planning, disciplined budgeting, and a sharp eye on execution. The financing process is equally detailed. To secure approval, borrowers must demonstrate more than just a promising vision. Lenders use a combination of financial, operational, and market-based criteria to determine whether a project is worthy of funding.
For developers, builders, and investors, understanding these factors is critical. Here are ten of the most important elements lenders evaluate when reviewing applications for ground up construction loans.
1. Borrower Experience
One of the first things lenders assess is whether the borrower has managed projects of similar size and complexity before. Past experience builds confidence that the borrower knows how to navigate common challenges like permitting delays, contractor disputes, or cost overruns. While first-time developers can still qualify, having an experienced general contractor or project manager on the team can offset the lack of direct track record.
2. Financial Strength
A borrower’s financial health plays a pivotal role in the decision-making process. Lenders look beyond credit scores to evaluate liquidity, reserves, and overall net worth. This analysis ensures that the borrower has the resources to cover unexpected costs if the project runs into obstacles. Even the most well-planned developments face surprises, and financial strength provides a safety net.
3. Equity Investment
Skin in the game matters. Borrowers who contribute a meaningful equity stake demonstrate commitment and reduce the lender’s risk exposure. A typical expectation is 20 to 30 percent of the total project cost, though this can vary depending on the lender and the scope of the project. The equity contribution also aligns the borrower’s interests with those of the lender, creating a shared incentive to see the project succeed.
4. Project Plans and Documentation
Lenders want to see more than a concept sketch or a rough timeline. Comprehensive architectural drawings, engineering reports, zoning approvals, and contractor bids all strengthen an application. A detailed project plan demonstrates professionalism and preparation, giving lenders confidence that the borrower understands what it will take to complete the development. The more precise the documentation, the fewer unanswered questions remain in the lender’s mind.
5. Budget and Cost Estimates
A realistic, itemized budget is essential. Lenders examine whether projected costs align with industry standards and whether adequate contingencies are built in. If the numbers appear overly optimistic or out of line with market norms, the application may raise concerns. Accurate cost estimates, backed by credible contractors or third-party evaluations, go a long way toward building trust.
6. Market Feasibility
Even a well-designed project is only as strong as the market demand behind it. Lenders study local conditions, including supply and demand, absorption rates, and comparable developments. For example, a new multifamily building in an already saturated market may be considered too risky. On the other hand, a well-placed project in a growing area with strong population or job growth signals opportunity. Borrowers who provide their own feasibility studies show initiative and preparedness.
7. Construction Team and Contractors
The individuals responsible for bringing the project to life carry significant weight in the approval process. Lenders want assurance that the builder, architect, and key subcontractors have proven track records of completing projects on time and within budget. References, portfolios of completed work, and licensing documentation all strengthen an application. A strong team signals lower risk.
8. Risk Management Strategies
Construction inherently carries risk. Weather delays, labor shortages, cost escalation, and permitting challenges can derail even the best plans. Lenders evaluate whether the borrower has strategies in place to mitigate these risks. This might include fixed-price contracts with contractors, adequate insurance coverage, or arrangements with backup suppliers. Borrowers who acknowledge potential risks and proactively plan for them tend to stand out as more credible.
9. Loan-to-Cost and Loan-to-Value Ratios
Numbers matter as much as narratives. Lenders analyze loan-to-cost (LTC) and loan-to-value (LTV) ratios to determine the appropriate level of financing. For instance, a lender may be willing to cover 70 to 80 percent of project costs, leaving the remainder to the borrower. These ratios help balance the level of risk shared between borrower and lender. The stronger the borrower’s financial position and equity contribution, the more favorable these ratios may be.
10. Exit Strategy
Perhaps the most important factor of all is how the borrower plans to repay the loan. A well-defined exit strategy—whether through selling the completed property, refinancing into a permanent loan, or holding the asset for long-term cash flow—provides clarity and confidence. Without a realistic exit plan, even the most promising project can appear uncertain. Lenders want assurance that they will be repaid on time and in full.
Bringing It All Together
When it comes to securing approval, success depends on presenting a clear, compelling, and well-prepared application. Ground up construction lenders are not only evaluating the numbers but also the people, plans, and market conditions behind the project. By addressing each of these ten factors in detail, borrowers can position themselves as strong candidates for funding.
Ground up construction loans represent significant opportunities for developers and investors to create value where none existed before. But with opportunity comes responsibility, and lenders want to know that borrowers are up to the challenge. Preparation, transparency, and professionalism are the keys to turning an ambitious vision into a fully financed reality.