Construction Loans for Contractors: What Lenders Actually Require

Estimated reading time: 8 minutes

You can build a house with your own hands. You have run crews, managed subs, and delivered projects for clients across Northern California. Yet when you apply for financing to build your own project, the lender treats you like a beginner. This is the most common frustration we hear from builders, and it is worth understanding before you apply. Construction loans for contractors are underwritten on a different definition of experience than the one your license represents. This guide explains what lenders actually look for, what you should expect to bring to the table, and how to position your first project to get approved.

What Lenders Mean by Experience

Here is the distinction that catches most general contractors off guard. When a private lender asks about experience, they are not asking how many homes you have built. They are asking how many projects you have completed as the owner. In other words, projects where you were on title, carried the debt, managed the budget, and executed the exit.

A GC with thirty client builds and zero personal projects is, on paper, a first-time borrower. That may feel unfair. However, the lender’s reasoning is sound. Building for a client and building on your own balance sheet are different disciplines. When you build for a client, someone else absorbs the carrying costs, the financing risk, and the consequences of a slow sale. When you build for yourself, all of that lands on you.

This is why underwriters verify experience through title records and closed loan history rather than a resume. Your contractor’s license proves you can build. Title history proves you can borrow, manage a construction budget, and repay.

Equity Requirements for Construction Loans

Construction lenders quote leverage as loan-to-cost, or LTC. This is the loan amount divided by the total project cost, meaning land plus hard costs, soft costs, and financing costs. The gap between the loan and the total cost is your equity contribution.

In today’s market, the best case for an experienced builder is roughly 90% LTC. That means you contribute about 10% of total project cost. If you are inexperienced by the lender’s definition, expect to contribute 15% or more. Some programs advertise higher leverage, but in practice most funded construction deals settle between 80% and 85% LTC once the full budget is underwritten.

A few other terms are worth knowing as you shop. Most private construction programs look for a minimum credit score around 680. Loan terms typically run 9 to 24 months with extension options. Rates generally start in the high 8% to high 9% range, and origination fees typically run a few points, depending on experience and leverage. A point is 1% of the loan amount, paid at closing, so budget for points as a real cost of the project rather than a footnote. A single loan can usually finance both the land acquisition and the construction budget, which keeps the capital stack simple.

Ask Whether the Loan Is Dutch or Non-Dutch

Before you sign a term sheet, ask one question that most first-time borrowers never think to ask. Is the loan Dutch or non-Dutch?

On a Dutch loan, interest accrues on the full loan amount from day one, including the construction funds that are still sitting undrawn in the holdback. On a non-Dutch loan, interest accrues only on the balance you have actually drawn. The difference sounds technical, but on a ground-up project it can change your carrying costs by tens of thousands of dollars. For example, a builder who closes on the land and does not pull major draws until month three pays interest on a fraction of the loan under a non-Dutch structure. Under a Dutch structure, the meter runs on everything from closing.

Neither structure is automatically better. Dutch lenders sometimes offer lower rates or fewer points to offset the higher accrual, so the honest comparison is total cost of capital over your realistic timeline, not the headline rate. What matters is that you know which structure you are being quoted before you commit.

This is also where working with a broker earns its keep. Different lenders run different programs, hold different licenses, and are built for different projects. In California alone, private construction lenders may operate under Department of Real Estate or Department of Financial Protection and Innovation licensing, and each program carries its own leverage limits, pricing, and draw mechanics. As a result, the right lender for a first-time spec build is rarely the right lender for a ten-unit infill project. Matching the file to the program is the work.

Why Liquidity Matters as Much as Equity

Equity is what you put in at closing. Liquidity is what you still have after closing. Lenders care about both, and builders who empty their accounts to hit the down payment are often surprised to be declined.

The reason comes down to how construction loans fund. Draws are reimbursement based. You pay your subs, buy your materials, and complete a phase of work. Then you submit a draw request with invoices and receipts, the lender inspects, and funds are released, typically within a few business days. That gap between paying for work and being reimbursed for it is where undercapitalized projects fail. Not at closing, but at month four.

In addition, budgets move. Cost overruns are the norm in ground-up construction, not the exception. Most lenders want to see a contingency line of 5% to 10% of hard costs, and they want liquidity beyond it. If remaining costs ever exceed the remaining draw balance, a lender can reduce or pause draw funding until the budget is back in balance. The builder with reserves writes a check and keeps the project moving. The builder without reserves watches the project stall while interest accrues.

As a working rule, plan to show post-closing liquidity of roughly 10% of the loan amount, or enough to cover your contingency plus several months of carry. Carry means interest, insurance, taxes, and utilities, all of which continue whether or not the framing crew shows up. Your Personal Financial Statement is where this gets verified, so it pays to prepare it carefully.

How Contractors Without Title History Can Still Qualify

If you are a capable builder without owned projects on your record, you are not locked out. You simply need to structure your first deal with the lender’s risk in mind. Four approaches work consistently.

First, bring more equity. Moving from 10% down to 15% or 20% changes the risk profile of the loan and often unlocks approval on its own. Second, partner with an experienced sponsor. Adding a co-borrower or guarantor who has completed owned projects lets the deal borrow their track record while you build your own. Third, start smaller. A single spec home or a modest infill build establishes title history and closed loan history. Your second loan will price better than your first. Fourth, keep your reserves intact. A borrower at 15% down with strong liquidity is more fundable than a borrower at 10% down with nothing left.

There is a fifth point that matters as much as the other four. Be straightforward about your experience. Underwriters verify everything through title and credit records, so an inflated track record does not survive underwriting. A clearly presented first-time file with honest numbers gets further than an impressive story that falls apart in diligence.

How Construction Loans Compare to Other Private Financing

Ground-up construction financing sits within the broader family of private lending. If your project involves an existing structure rather than new construction, a bridge or fix-and-flip loan may fit better, and our guide on when to use a bridge loan walks through the most common situations. If your exit is to hold and rent the finished property, understanding DSCR loans now will make your refinance smoother later, since the takeout lender will underwrite the property’s rental income. For a broader overview of how private lending works, our private money loans FAQ is a useful starting point.

Working With Mayacamas Lending

Mayacamas Lending arranges business-purpose construction and bridge financing for builders and investors throughout Northern California. We underwrite the way we would want to be underwritten. That means telling you early what a lender will require, where your file is strong, and where it needs work before submission.

If you are a contractor planning your first owned project, or an experienced builder looking for better terms on your next one, we are glad to review the deal with you. Bring your budget, your timeline, and an honest picture of your liquidity. We will tell you the truth about where it stands.

Mayacamas Lending Inc. | CA DRE #02306252 | Santa Rosa, California. Loans are for business purposes only. Terms vary by project, borrower profile, and market conditions.