Ground-Up Construction and Bridge Loans: The Non-QM Playbook for Builders

Rehab and construction lending runs on a different clock than permanent financing. The money moves in stages, the property changes during the loan, and the exit matters more than the entry. LOs who learn the vocabulary — draws, LTC, ARV, interest reserve, takeout — can serve builders and bridge investors who transact several times a year and rarely have a lender they trust completely. The learning curve is real but short.

How a draw schedule actually works

A construction or heavy-rehab loan doesn't hand over the full budget at closing. It funds the land or acquisition, then reimburses construction costs in draws as work completes. The borrower pays a subcontractor, requests a draw, an inspector verifies the work, and the lender releases funds — typically in a few business days on a well-run program, longer on a slow one. That gap is the part borrowers underestimate: they need working capital to front each stage. A builder with a thin cash position and a lender with a ten-day draw turnaround is a project that stalls. Ask every investor two questions: how fast do draws fund, and do you require inspection on every draw or only at milestones?

Three leverage numbers, and which one binds

• LTC — loan to cost. The percentage of total project cost (acquisition plus construction budget) the lender will fund. Commonly 80–90% for experienced builders.
• LTV — loan to value, measured against current as-is value. Governs the acquisition portion.
• ARV — after-repair or as-completed value. Usually the hard ceiling, often 65–75%.
• The binding constraint is whichever produces the smallest loan — model all three before you promise a number.

A worked example makes it concrete. Purchase at $200,000, construction budget $150,000, as-completed appraisal $475,000. At 85% LTC the loan is $297,500. At 70% ARV the ceiling is $332,500. LTC binds, so the borrower brings roughly $52,500 plus closing costs and carrying costs. Change the ARV cap to 65% and the ceiling drops to $308,750 — LTC still binds. But if the appraisal comes back at $410,000, the 70% ARV ceiling is $287,000 and now ARV binds, and the borrower needs another $10,500 they hadn't planned for. That's why you model all three and why the appraisal is the single most consequential moment in the file.

Interest reserves and the real cost of carry

Many construction and bridge programs build an interest reserve into the loan — the lender escrows projected interest and pays itself from the reserve during the build, so the borrower isn't writing monthly checks on a property producing no income. It's a genuine convenience, but two things follow. First, the reserve is borrowed money that consumes loan proceeds, so it reduces what's available for construction. Second, if the project runs long, the reserve depletes and the borrower starts paying out of pocket at exactly the moment they're most stressed. Build the timeline conversation around a realistic schedule plus a buffer, not the builder's optimistic one.

The exit has to exist before the entry

Bridge and construction loans are short — typically twelve to twenty-four months — and they end in one of two ways: the property sells, or it refinances into permanent financing. Underwrite the exit at origination. If the plan is to sell, does the ARV hold up against actual comps and current days-on-market in that submarket? If the plan is to hold and rent, will the completed property support a DSCR refinance at prevailing rates — and does the borrower qualify for that takeout today, not hypothetically? An investor who can't exit at maturity needs an extension, and extensions cost money and goodwill. The LO who verified the exit up front is the one who gets the refinance too.

Experience is the underwriting variable that moves most

Construction lenders price experience heavily. A builder with a documented track record of completed projects gets higher LTC, faster draws, and better rates than a first-timer with the same credit and the same deal. Help your clients document that track record — addresses, before-and-after photos, purchase and sale HUDs, timelines. A well-assembled experience schedule is worth real basis points and sometimes an extra 5% of leverage. It's also something almost no LO thinks to prepare for their borrower, which makes you the one who does.