Construction Loan Requirements: What You Need to Qualify in 2025
Construction Loan Requirements: What You Need to Qualify in 2025
Construction loans are among the most complex real estate financing products — and for good reason. Lenders are funding a property that doesn't yet exist, which requires careful underwriting of both the borrower and the project. Here's exactly what you need to qualify for a construction loan in 2025.
Credit Score Requirements
Most construction loan programs require a minimum credit score of 640–680. The best rates and highest leverage (up to 90% LTC) are available to borrowers with 720+ credit scores.
| Credit Score | Typical LTC | Rate Range |
|---|---|---|
| 720+ | Up to 90% | 9.5% – 11.0% |
| 680–719 | Up to 85% | 10.0% – 11.5% |
| 640–679 | Up to 80% | 10.5% – 12.5% |
Loan-to-Cost (LTC) vs. Loan-to-Value (LTV)
Construction loans are underwritten on loan-to-cost (LTC) — the loan amount as a percentage of total project cost (land + construction). Most programs offer up to 85–90% LTC.
The loan is also subject to a loan-to-value (LTV) cap based on the completed appraised value (as-completed appraisal). Typically, the loan cannot exceed 65–75% of the as-completed value.
Example:
- Land value: $100,000
- Construction cost: $300,000
- Total project cost: $400,000
- 85% LTC loan: $340,000
- As-completed appraised value: $550,000
- 70% LTV cap: $385,000
- Qualifying loan amount: $340,000 (LTC is the binding constraint)
Required Documentation
Project documents:
- Signed construction contract with licensed general contractor
- Detailed construction budget (line-item cost breakdown)
- Approved building plans and permits (or permit-ready plans)
- As-completed appraisal ordered by lender
Borrower documents:
- Personal financial statement
- 12–24 months bank statements (for asset verification)
- Entity documents (if closing in LLC)
- Resume of experience (for experienced developers)
Builder/contractor documents:
- Contractor license and insurance certificates
- W-9 and contractor profile
- References from prior projects
Experience Requirements
Construction loan requirements vary significantly based on borrower experience:
First-time builders: Higher down payment (20–25%), lower LTC (75–80%), and often a requirement for a licensed general contractor (owner-builder not allowed). Some lenders require a construction management company.
Experienced developers (3+ projects): Best rates, highest LTC (up to 90%), and owner-builder programs available in some states.
The Draw Schedule
Construction loans disburse funds in draws as construction milestones are completed. A typical draw schedule:
- Initial draw (at closing): 10–15% for mobilization, permits, site prep
- Foundation draw: 15–20% after foundation is poured and inspected
- Framing draw: 20–25% after framing, roof, and rough-in
- Drywall draw: 15–20% after drywall, insulation, mechanical rough-in
- Completion draw: 15–20% after certificate of occupancy
Each draw requires a third-party inspection and lender approval. Interest is charged only on funds drawn, not the full loan amount.
Construction Loan vs. Construction-to-Permanent Loan
A construction-only loan is paid off when the project is complete — typically through a sale or refinance into a permanent loan (DSCR, conventional, or commercial).
A construction-to-permanent loan (also called a "one-time close") automatically converts to a permanent mortgage when construction is complete, saving on closing costs.
AllApprovedHere.com offers both options for ground-up construction, ADU construction, and major additions in Arizona, California, Washington, Nevada, and Colorado. Get a free project review.