How Do Private Money Lenders Underwrite a Ground-Up Construction Loan?
By Andrew J. Liersch III — Founder & CIO, Slingshot Investments. 10+ years in private lending, $500M+ funded. Former Wells Fargo Private Mortgage Banking, Bear Stearns, and Deloitte Consulting.
Short answer: Private money construction underwriting comes down to five pillars: the land and its entitlements, the construction budget, the completed value, the builder, and the exit. Your credit score fine-tunes pricing, but it’s not the headline — the same asset-based logic we described for fix-and-flip underwriting applies here, with one big difference: on a dirt-start project, execution risk is the whole game, so the budget and the builder get scrutiny a flip file never sees. Approvals still move in days, not weeks, when the file is complete.
Here’s what a lender is actually looking at on each pillar — and what kills deals before they reach a term sheet.
Pillar 1: The land and its entitlements
The first question isn’t “what will you build?” — it’s “are you allowed to build it, and when?” Entitlement status is the single biggest driver of both terms and timeline:
- Permits ready to issue (RTI): best case. The clock starts at closing, the timeline is real, and leverage and pricing reflect it.
- Plans approved, permits pending: financeable, but the lender will pressure-test how long issuance actually takes in your jurisdiction — and in Southern California, “any day now” can mean months.
- Raw or unentitled land: a different loan entirely, with a lower advance against the dirt and the vertical budget held until entitlement milestones hit.
The lender also confirms the basics that sink projects late: zoning matches the plans, utilities reach the site, and there are no easements, setbacks, or soils issues the budget didn’t anticipate.
Pillar 2: The construction budget
The budget review is where construction underwriting earns its keep. The lender is checking three things:
Is it complete? A line-item budget covering sitework, foundation, framing, MEP, exterior, finishes, and soft costs — architecture, engineering, permits and fees, insurance. Lump-sum budgets (“$550K — trust me”) don’t underwrite.
Is it realistic? Your cost per square foot gets sanity-checked against what comparable product actually costs to build in your market right now. A budget meaningfully under local norms doesn’t read as efficiency — it reads as a future draw request the holdback can’t cover.
Does it have a cushion? A contingency line of roughly 10% is the mark of a builder who’s done this before. Its absence is the fastest way to get a term sheet re-traded, because cost overruns come out of your pocket once the holdback is capped.
The approved budget becomes the draw schedule, so precision here pays off all the way through the build.
Pillar 3: The completed value
Sizing runs on the dual caps we covered in how construction loans work — the lesser of loan-to-cost and completed-value LTV — so the appraisal’s completed-value opinion carries real weight. For a spec SFR, that means new-construction comps, selected with the same discipline as estimating ARV on a flip (easier, in one way: new-build comps need no condition adjustments). For multifamily, value is supported twice — per-unit sale comps and the income approach off stabilized rents — and underwriting leans on the more conservative of the two.
The red flag here: comps from the wrong product. A 2,200 sq ft new build doesn’t comp against 1960s originals two neighborhoods over, and an appraisal built on the wrong set gets caught — after it has cost you two weeks.
Pillar 4: The builder
This is the pillar that separates construction from flip underwriting. On a cosmetic rehab, a first-timer with a good contractor can pencil. On a ground-up build, most private money lenders want to see one of two things: at least one comparable completed build in your own track record, or a licensed general contractor with that track record attached to the project. The file: the GC’s license and references, a resume of completed projects, and evidence the team has built this product type at this scale. Financial capacity matters too — enough liquidity to front phases between draws, since draws reimburse completed work, and builder’s risk insurance bound before funds move.
Pillar 5: The exit
Two exits, same as always: sell or refinance. A spec sale exit lives or dies on the comps from Pillar 3 plus a timeline with margin — a 12-month build on a 12-month term is a hope, not a plan. A rental exit means the deal has to pencil as a refinance at today’s rates: projected rents, realistic lease-up, and debt service coverage that a long-term rental lender will actually sign off on. If the refinance only works at rates lower than today’s, the exit is a rate bet, and underwriting will price it like one.
What’s in the underwriting file?
The complete package, in one list: purchase contract (or deed, if you own the lot), full plans, permit status documentation, the line-item budget with contingency, GC license and project resume, your entity documents, builder’s risk insurance quote, title report, and the appraisal with a completed-value opinion. Deals with complete files move to term sheets in days — the timeline stretches only when the file arrives in pieces. (The same speed logic from how fast a private money loan can close applies: the borrower controls most of the clock.)
What kills construction deals in underwriting?
Four patterns, over and over: permits that are perpetually “two weeks out” paired with a term that assumes they’re in hand; a budget with no contingency line; comps borrowed from the wrong product type or neighborhood; and a first-time builder with no GC attached. None of these is fatal on its own — but each one converts to either a re-traded term sheet or a conditional approval, and all four are fixable before you submit.
Frequently asked questions
Do I need construction experience to get a ground-up loan? Not personally — but the project needs it somewhere. A licensed GC with a comparable track record attached to the deal satisfies most lenders.
Can I close before permits are issued? Sometimes, depending on the lender and how far along issuance is — but expect the vertical holdback to release only once permits are in hand, and expect the timeline math to be underwritten hard.
How long does construction loan underwriting take? With a complete file: days to a term sheet, 2–3 weeks to funding. The variable is almost always file completeness, not lender speed.
Does my credit score matter at all? It fine-tunes pricing and leverage at the margins. It doesn’t drive approval — the five pillars do.
Slingshot Investments originates and arranges business-purpose ground-up construction loans on non-owner-occupied residential and commercial real estate. California DRE Broker License #02002790. Nationwide except AK, ND, SD, VT. All loans subject to borrowers and underlying collateral meeting current underwriting criteria. Rates and terms subject to change without notice. This article is general information, not a loan commitment or financial advice.
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