What Is a Construction Loan?

How Construction Loans Work

Rather than funding the full loan amount on day one, a construction lender holds the proceeds and disburses them through a draw schedule tied to completed phases of work — site work, foundation, framing, mechanicals, drywall, finishes, and final completion. Each draw is typically verified by an inspector or progress report before funds are released.

Loan sizing usually relies on two ratios. Loan-to-Cost (LTC) measures the loan against the total project cost (land plus hard and soft construction costs). Loan-to-Value (LTV) measures the loan against the appraised completion value — what the finished property is expected to be worth. Most Sacramento construction lenders cap LTC around 85–90% and LTV around 75%.

Who Uses Construction Loans?

• Builders constructing spec homes for resale in Roseville, Folsom, and Elk Grove infill lots
• Developers building 1–4 unit residential or small multifamily projects across Northern California
• Investors converting raw land or tear-down parcels into finished product
• First-time developers partnering with a licensed general contractor

Hard Costs vs. Soft Costs

A complete construction budget separates hard costs (materials, labor, GC fees) from soft costs (permits, engineering/plans, architectural fees, insurance, loan interest reserves, and contingency). Lenders expect both to be detailed in a line-item budget supported by contractor bids and engineering documents.

What Lenders Review

Underwriting evaluates borrower credit, liquidity, experience, GC qualifications, permit status, the construction budget, and the appraisal/completion value. Project viability and exit strategy — sale, refinance to a long-term mortgage, or hold — are central to the credit decision.

See our full requirements checklist, LTC vs LTV breakdown, and draw schedule guide.

Exit Strategy: Sell vs. Hold

Every construction loan has a defined exit. Builders selling at completion repay the loan from sale proceeds. Investors planning to keep the finished property as a long-term rental typically refinance into permanent investor financing — most commonly a DSCR loan, which qualifies on the property's rental cash flow rather than personal income. Lining up that takeout early helps avoid extension fees when the construction term matures.