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Construction loans: everything you need to know

September 12, 2022

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Master ImageFinding the ideal property or project is the first step in developing real estate. It is then important to work with strong, reliable financial partners to turn your plans into reality. Construction costs continue to rise, so it's more important than ever to have financing in place to cover all aspects of development, such as land purchases, materials, insurance, and labor. Building a business from scratch requires financing for all aspects of its real estate development. Ground-up construction loans provide the perfect solution. The reason for this will be explained in more detail here.

What are construction loans?
Construction loans are short-term loans issued for the purpose of financing real estate projects. A traditional mortgage, also called a permanent loan, will help you buy an existing house. However, a construction loan can be useful if you are building a new property from scratch, especially if you need to purchase raw land as well.

How does a Ground-Up Construction loan work?
The loan can be applied for by anyone who invests their time and money in construction or related expenses. An individual homeowner, a contractor, or a small business owner can use a construction loan to finance their construction project. If you already own a property, the equity you have in that property can be used as a down payment on your construction loan. Many borrowers ask how a construction loan becomes a mortgage.


After the home is completed and the term of the loan ends (usually only one year), the borrower can refinance the construction loan into a permanent mortgage. Alternatively, the borrower can apply for a new loan (often called a "final loan") to pay off the construction loan.

Does the borrower have to make monthly payments on a construction loan?
Yes. However, interest payments on this loan may only be required while the construction project is ongoing. Unlike a lump sum loan, construction loans are similar to a line of credit, so interest is based only on the actual amount you borrow to complete each part of a project, not all at once. Some construction loans may require that the balance be repaid in full by the time the project is completed.

A construction loan can be used not only for the actual building, but also for construction equipment, building materials, or hiring employees. It is possible to use these loans to build single-family homes, multi-family homes, and mixed-use properties such as office parks and retail centers. Some of them and the most commonly used ones are described below:

  • Single-family:Classified as residential buildings with one to four units, including condominiums, P.U.D., townhomes, duplexes, triplexes, and quadplexes.
  • Multifamily (up to 64 units): A classification of housing in which multiple dwelling units (5+) are located in one or more buildings within a community or complex.
  • Mixed Use: A type of development where residential and commercial uses are combined in an integrated complex or building.



  • At Gallagher Capital, we have financing options designed to provide efficient solutions for the construction of single-family homes, multifamily units and mixed-use projects that are ready to build or shovel-ready. This type of loan is a great opportunity for experienced builders or developers looking to start a new project without having to wait for bank financing. It is also great for builders who own an entitlement or shovel-ready property but need the financing to get the project started, or for a fix & flip project that involves extensive renovation work requiring vertical or significant horizontal additions to the property. This program is a great way to purchase land to build a single family home or multifamily dwelling.

    We offer you the opportunity to close quickly with a reliable and experienced lender as your financing partner. Do not hesitate to count on us when you need financing for your real estate investment, we can offer you a wide range of financial products to suit your needs. If you have any questions or would like more information, call or text us at 800-369-2342


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