Building the Dream: What to Know about Construction Loans
Building a home from the ground up or undertaking a major renovation can be one of the most rewarding ways to create the life you want. It also introduces a unique set of financial complexities, especially when it comes to securing financing.
Construction loans are a specialized solution designed to support the full arc of a building project, from blueprint to final inspection. But unlike a traditional mortgage, they come with a host of important differences, from how funds are released to how the underwriting process works.
Whether you’re planning your dream home or embarking on a major remodel, understanding how construction loans work and how they compare to other financing options, like securities-backed lines of credit, can help you move forward with clarity and confidence.
What is a construction loan?
A construction loan is a short-term financing tool that provides funds throughout the building process in a series of disbursements, or “draws.” These draws are tied to specific project milestones and typically verified through on-site inspections.
Most construction loans are structured as interest-only for the duration of the build, with terms lasting anywhere from 6 months to 24 months. At the end of the project, many loans offer the option to convert into a permanent mortgage, streamlining the transition to long-term financing.
How it’s underwritten and why it’s more involved
Unlike traditional mortgages, which evaluate a completed property’s current value, construction loans are underwritten based on the projected future value, which is usually calculated as the cost of the land plus the construction budget.
Here’s what else is different:
- Comprehensive builder review: The lender will assess your builder’s licensing, financial stability and past track record.
- Detailed plans and budgets: You’ll need to have architectural plans, permits and a signed construction contract in hand before applying.
- Disbursement oversight: Rather than a lump sum, funds are released in phases, each tied to a specific milestone and often subject to inspection.
- Liquidity and reserves: To account for cost overruns or delays, lenders typically require 5%–10% of the project cost in contingency reserves, along with evidence that you can cover ongoing housing expenses during construction.
Put simply: You’re not just being evaluated as a borrower. The project, the builder and the feasibility of the timeline all come under the lender’s microscope.
Construction loan vs. securities-based line of credit (SBLOC)
If you have a well-funded investment portfolio, you might wonder whether you should simply tap it via a securities-backed line of credit (SBLOC) or a margin loan instead.
Here’s how the two approaches compare:
Construction loan
| Pros | Cons |
|---|---|
| Designed specifically for homebuilding projects. The draw schedule, inspections and oversight help keep things on track. Some loans offer built-in conversion to permanent financing. | More documentation is required, and the process takes longer. The property must be professionally appraised based on future value, and funds are only disbursed at the permission of the lender. |
LOC/Margin
| Pros | Cons |
|---|---|
| Quick setup, minimal paperwork and flexible use of funds. Ideal for short-term liquidity or smaller projects where lender oversight isn’t necessary. | Your loan is tied to your investment portfolio, so market dips can trigger margin calls or forced sales. There’s also no structured oversight, meaning you’re fully responsible for managing timelines and payouts to contractors. |
For those who want control and speed, an SBLOC can be ideal. For large projects with a defined construction timeline, traditional loans may offer more structure and another party keeping the project moving. Both can be used strategically, and they may even be used together when structured with care.
SBLOCs can be highly convenient, but they come with real risks, especially if markets dip while your loan is outstanding. A construction loan, on the other hand, is built specifically for this purpose, with a level of structure that helps reduce execution risk.
How we help clients navigate this process
At Corient, we help our clients think through how construction financing fits into their bigger picture. That might mean coordinating with estate planners, running cash flow simulations or comparing loan structures through a strategic lens.
From tax implications to liquidity planning, our team helps ensure that your construction loan aligns with your broader goals, so your dream project doesn’t turn into a financial detour.
If you’re considering building or renovating, let’s talk early in the process. That’s when we can add the most value by aligning your financing strategy with the life you’re working to build.
ABOUT THE AUTHOR
Jake Roman
Jake Roman is Head of Client Lending Solutions based in our New York office. He has 5+ years experience in financial services with a focus on lending.
Prior to joining Corient, Jake was with Wells Fargo in their Residential Mortgage group. Jake grew up in Northern New Jersey and now resides in New York City. He earned a degree in Finance from James Madison University.
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