Requirements at a Glance
Lenders evaluate qualification across three independent boxes: the property fundamentals, the borrower and sponsorship profile, and the business plan or use of proceeds. A single failure in any box can derail a deal even when the other two are strong.
| Category | Requirement | Detail |
|---|---|---|
| Property | Permits and entitlements in hand | Building permits issued or at final approval stage; grading and demolition permits also required before first draw |
| Property | As-completed appraised value | Loan must not exceed 65% of as-completed value per independent appraisal ordered by lender |
| Property | Pro forma DSCR at stabilization | 1.20x minimum based on market rents or pre-leasing evidence; 1.25x preferred by bank lenders |
| Property | Environmental clearance | Phase I environmental site assessment required; Phase II triggered by recognized environmental conditions |
| Borrower | Equity contribution | 30% to 40% of total project cost in front before first loan draw; land equity counted at current appraised value |
| Borrower | Completion guarantee | Full completion guarantee from sponsor required universally; carve-outs available on institutional deals above $25M |
| Borrower | Net worth and liquidity | Net worth at least equal to loan amount; liquidity of 10% of loan amount post-close including interest reserve funding |
| Borrower | Development track record | 2 or more comparable completed ground-up or adaptive reuse projects of similar scale and product type |
| Borrower | Credit score | 700+ FICO from primary guarantor; lenders will review all principals with 20%+ ownership |
| Business Plan | Fixed-price construction contract | Executed GMP or fixed-price contract with a licensed, bonded GC; open-book cost-plus contracts require additional contingency |
| Business Plan | Construction contingency | 5% to 10% of hard costs funded into loan or held in escrow; adaptive reuse and historic rehab projects require 10%+ |
| Business Plan | Interest reserve | Funded interest reserve sized for the full construction period plus a 3 to 6 month buffer built into the loan at closing |
| Business Plan | Takeout strategy | Executed letter of intent from permanent lender, forward commitment, or documented presales sufficient to retire construction debt |
| Documentation | Construction budget and draw schedule | Line-item hard and soft cost budget reconciled to GC contract; monthly draw schedule with inspection milestones |
Documentation You Will Need
Sponsors who arrive at term sheet stage with these documents in hand close 1 to 2 weeks faster than those who scramble during due diligence.
- Full project pro forma with hard costs, soft costs, financing costs, and stabilized income projections
- Executed or near-final fixed-price or GMP construction contract with licensed, bonded general contractor
- GC resume and financial statements including bonding capacity confirmation
- Architect and engineer agreements with construction plans and specifications
- Issued building permits or written confirmation of permit status from the relevant jurisdiction
- Phase I environmental site assessment (Phase II if required by lender)
- Appraisal ordered by lender showing as-completed and as-stabilized value
- Borrower personal financial statement (PFS) dated within 60 days
- 2 years of personal and entity tax returns for all guarantors
- Schedule of real estate owned with current debt balances and equity positions
- Entity organizational documents (operating agreement, articles, certificates of good standing)
- Title commitment and ALTA survey
- Letter of intent or term sheet from permanent takeout lender
- Evidence of equity already in the deal (land purchase HUD-1, wire records, capital account statements)
What Qualifies You
These are the factors that materially improve qualification odds and pricing.
Experienced development team with comparable completions
Lenders scrutinize the development team's resume more closely in construction than in any other loan type. Sponsors with 2 or more comparable ground-up completions of similar scale, product type, and market tier get significantly better pricing and higher leverage. First-time developers without an experienced co-sponsor or development manager typically cannot qualify with bank construction lenders.
Strong equity position with land owned free and clear
Sponsors who own the land free and clear and are contributing it as equity at appraised value demonstrate commitment and simplify the equity stack. Lenders view pre-owned land as the strongest form of equity injection because it removes closing risk on the land purchase entirely.
Fixed-price contract with a financially strong general contractor
A GMP or fixed-price contract from a licensed, bonded GC with demonstrated financial strength materially reduces cost overrun risk in the lender's underwriting. GCs with active bonding lines of at least 10% of the contract value and 3 or more comparable completions are the strongest profile.
Adequate construction contingency funded at closing
Lenders require 5% to 10% of hard costs in contingency held in a controlled account. Adaptive reuse, historic rehabilitation, and projects with complex site conditions require 10% or higher. Underfunded contingency is one of the most common reasons construction loans go into default, and lenders price deals with thin contingency accordingly.
Credible and committed permanent takeout strategy
The single most important underwriting question in construction lending is how the loan gets repaid. An executed forward commitment from a life company, a Fannie Mae or Freddie Mac approval for multifamily, or a documented presales program for for-sale product all materially de-risk the deal. Deals with only a vague plan to refinance into perm at stabilization get priced wide or declined.
Pre-leasing or presales evidence for non-residential product
Office, retail, and industrial construction deals benefit significantly from executed pre-leases or letters of intent from creditworthy tenants. Anchor tenant pre-leases covering 30% or more of the rentable area materially improve LTC availability and pricing. Multifamily ground-up does not require pre-leasing but benefits from strong submarket vacancy data.
Interest reserve sized conservatively with schedule buffer
Lenders stress-test the interest reserve against a construction schedule extension of 3 to 6 months beyond the base case. Sponsors who build that buffer into the funded reserve at closing reduce the risk of a mid-construction default triggered by a schedule slip. Thin interest reserves on aggressive construction timelines are a common underwriting concern.
What Disqualifies You
Common decline reasons that surface during underwriting. Most can be addressed with structuring or by routing the deal to a different program.
Missing or incomplete permits at closing
Construction lenders almost universally require building permits to be issued or at final approval stage before funding. Deals where entitlements are contested, under appeal, or subject to discretionary approval by a municipality that has not yet acted are not fundable. Permit delays post-close that push timelines materially beyond the funded interest reserve are a default trigger.
No comparable development track record and no experienced partner
Bank construction lenders and most institutional debt funds require the sponsorship group to have completed 2 or more comparable projects. First-time ground-up developers without an experienced co-general partner, development manager, or operating partner with a verifiable track record of similar completions will be declined at virtually every institutional construction lender.
Undercapitalized or unproven general contractor
A GC without a verifiable bonding line, without comparable completions, or with active litigation or judgment liens is a near-automatic decline at the bank level. Lenders rely on the GC to deliver the project on budget and on schedule. A weak GC undermines the entire underwriting thesis regardless of sponsor quality.
Total project cost significantly over market replacement cost
If the pro forma total project cost materially exceeds the as-completed appraised value, the deal fails basic feasibility underwriting. Lenders will not fund deals where cost exceeds value by more than a modest margin, because a stabilized sale or refinance would not cover the construction loan balance even in a best-case scenario.
No funded interest reserve and negative carry during construction
Construction projects produce no operating income during the build period. Lenders require either a funded interest reserve built into the loan or documented third-party income sufficient to service interest. Sponsors who cannot fund a reserve and have no other income source to service the loan during construction are a material default risk.
Typical Qualified Borrower
If your situation matches one of these profiles, the program is likely a strong fit.
- Multifamily developer with 3 or more prior ground-up completions seeking construction financing for a 50 to 200 unit apartment project with agency takeout at stabilization
- Industrial developer building speculative or build-to-suit warehouse and distribution facilities in supply-constrained submarkets with a defined lease-up or sale exit
- Mixed-use developer combining ground-floor retail with residential units in an infill urban location with strong pre-leasing on the commercial component
- Adaptive reuse sponsor converting obsolete office or industrial buildings to residential or mixed-use with historic tax credit equity and a bank construction facility
- For-sale residential developer building townhomes or condominiums with a presales program sufficient to satisfy construction lender presale thresholds
- Experienced single-tenant net-lease developer building a credit-tenant facility under a long-term ground lease or build-to-suit with an executed lease before construction start
- Self-storage or senior housing developer with a track record in the product type seeking construction financing with a DSCR-based permanent loan as the defined exit
Timeline
Commercial construction loans typically close in 45 to 75 days from term sheet acceptance, reflecting the added complexity of permit verification, plan and spec review, GC financial due diligence, and lender-ordered appraisals incorporating as-completed and as-stabilized values. Third-party reports including the appraisal, environmental, and geotechnical review run in parallel and typically take 4 to 5 weeks. Sponsors who arrive at term sheet with a complete permit package, an executed GC contract, and a reconciled line-item budget shave 2 to 3 weeks off the closing timeline.
Frequently Asked Questions
How much equity do I need for a commercial construction loan?
Standard construction loan equity requirements run 30% to 40% of total project cost, contributed in front before the first loan draw. Land owned free and clear counts as equity at current appraised value. Adaptive reuse deals and projects in secondary markets typically require equity at the higher end of that range. Lenders also verify liquidity of 10% of the loan amount post-close.
Do permits need to be in hand before a construction loan closes?
Yes. Virtually all institutional construction lenders require building permits to be issued or at final approval stage as a condition of closing or first funding. Some lenders will commit and execute loan documents with permits pending, but no funds are advanced until permits are confirmed. Deals with contested or incomplete entitlements are not fundable at the bank level.
What does a construction lender look for in a general contractor?
Lenders evaluate the GC on three criteria: financial strength (active bonding line of at least 10% of the contract value), comparable project completions (2 or more projects of similar scale and type), and clean litigation history. The GC must be licensed and bonded in the project jurisdiction. An undercapitalized or unproven GC is a near-automatic decline regardless of sponsor quality.
How is a construction loan different from a bridge loan?
A construction loan funds a project being built from the ground up or substantially rebuilt, advancing proceeds in draws tied to verified construction progress inspected by a lender-appointed inspector. A bridge loan finances an existing asset through a value-add or lease-up period. Construction loans require a funded interest reserve, a GC contract, permits, and a completion guarantee that bridge loans typically do not require.
What is a construction contingency and how much do I need?
A construction contingency is a reserve held within the loan budget to absorb cost overruns without requiring a new funding source. Lenders require 5% to 10% of hard costs in contingency, funded at closing or held in a controlled escrow account. Adaptive reuse, historic rehabilitation, and projects with complex site conditions require 10% or more. Thin contingency is one of the most cited reasons construction loans default.
Can I get a construction loan without a permanent takeout commitment?
You can close a construction loan without a fully executed forward commitment from a permanent lender, but you must demonstrate a credible and specific exit plan. The strongest positions are a Fannie Mae or Freddie Mac approval for multifamily, an executed LOI from a life company, or documented presales. A vague plan to refinance at stabilization without evidence of takeout capacity will be declined or priced with significant additional spread.
What credit score is required for a construction loan?
Most bank construction lenders require a 700 or higher FICO from the primary guarantor, with all principals holding 20% or more ownership reviewed. Institutional debt funds may accept scores in the 680 range on deals with very strong project fundamentals and sponsor track records. Unlike permanent loans, credit score is a secondary factor to development experience and project economics in construction underwriting.
Is construction financing recourse or non-recourse?
Bank construction loans are almost universally full recourse to the sponsorship group for the duration of the construction period. Completion guarantees are required by all construction lenders regardless of loan size, obligating the sponsor to complete the project and fund cost overruns. Non-recourse construction financing exists at the institutional debt fund level for deals above $25M to $30M with strong sponsorship, but it is the exception rather than the rule.
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