Hard Money Commercial Construction Loans — The Quick Read: A hard money commercial construction loan is private, asset-based financing. It funds a ground-up build or a major renovation in phases. The lender releases money as work gets done, not as one lump sum at closing. Underwriting focuses on the property’s projected value, the sponsor’s equity stake, and the exit plan. It does not focus on personal income documents. On the strongest files, leverage can reach up to roughly 90% loan-to-value. Most deals land lower once cost overruns, contingency reserves, and draw rules get factored in. The tradeoff for that speed and flexibility: construction files lean heavily recourse. Inspections and paperwork control every dollar that goes out the door.
This is business-purpose financing for investment and commercial property. It’s not for a personal residence or an owner-occupied build.
What this loan actually costs to carry in your market.
Hard money is priced by time, not by coverage. Enter the deal and see the cash required at closing, the carry while you hold it, and what is left at the exit.
Top leverage tiers are reserved for experienced investors with a documented track record; the rehab portion funds in draws against completed work, not at closing.
Program parameters shown update from Lendmire’s centralized guideline source. Rate, points, and months are editable assumptions, not quoted terms.
Deal estimate
Illustrative estimate only — not a quote, Loan Estimate, approval, or commitment to lend. Rate, points, and months are editable assumptions. Hard money is business-purpose financing for real estate investors. Leverage tops out near 90% of purchase for experienced investors, with rehab funding up to 100% of the documented budget; actual terms vary by lender, borrower experience, property, and exit. Hard money is not priced off the conforming mortgage curve, so this rate is a market-typical assumption rather than a published index.
What a Hard Money Commercial Construction Loan Actually Is
At its core, this is private money lent against a project that doesn’t fully exist yet. Maybe it’s a vacant lot with plans. Maybe it’s a shell that needs a full build-out. Maybe it’s a renovation big enough to change the property’s use or value class. This differs from a stabilized-asset bridge loan or a purchase loan in one key way: the collateral isn’t a finished building with a clean appraisal. Instead, it’s a budget, a set of plans, and a contractor’s track record. The lender has to underwrite all of that alongside the land or existing structure.
A few things separate this from a bank construction loan or an SBA product:
- Sizing runs off project cost and projected completed value together, not a simple purchase-price appraisal.
- Funds release in stages tied to verified work-in-place, not as a lump sum.
- Underwriting is asset-based first. Sponsor experience, project feasibility, and exit strategy carry real weight. Credit minimums vary by program rather than following one fixed script.
- Terms tend to run shorter than permanent debt. That’s because the loan is built to get replaced once the project stabilizes.
- Almost every construction-phase file carries a personal guarantee, no matter how the loan gets marketed.
None of this makes it a fallback for troubled borrowers. In practice, sponsors pick this route for a simple reason: a bank’s construction desk won’t touch a spec project, a value-add conversion, or a builder with only two finished projects on their resume. Timing and project type drive the decision far more than credit trouble does.
How Underwriting Actually Treats a Construction File, Step by Step
Step 1: The loan gets sized against cost, not just future value. The finished asset doesn’t exist on day one. So lenders lean on Loan-to-Cost — the loan amount divided by total acquisition, development, and construction cost — as the main sizing tool. They also run a parallel loan-to-value check against the appraiser’s completed-value opinion. Then they size to whichever number is more conservative (FNRP). On riskier ground-up deals, that cost-based ratio tends to cap out near 80% industry-wide. That means the sponsor must bring meaningful cash equity into the deal before the lender’s money is at risk (FNRP).
Here’s a mechanical rule worth knowing when a single loan funds both land acquisition and vertical construction. Federal bank underwriting guidance says the loan-to-value limit that applies is the one tied to the final completed phase of the project. Meanwhile, disbursements stay capped to actual development or construction costs as they happen (Cornell Law School’s Legal Information Institute, hosting the OCC’s real estate lending appendix). Hard money underwriters don’t have to follow that framework, but most copy the same logic anyway: value gets measured against the finished building, and money only moves against work that’s actually been done.
Step 2: The appraisal has to answer the right question. A commercial construction appraisal usually reports one of two hypothetical scenarios. The first is an “as complete” value — this assumes the building is finished today, even though it isn’t. The second is a prospective “upon completion” value — a forward-looking number that assumes construction finishes on schedule, per the plans and budget provided (Dart Appraisal). Mixing these two up is a known source of confusion in commercial files. Sizing a loan against the wrong scenario can badly misstate leverage before a single draw even funds.
Step 3: Draws replace the lump-sum payout. The construction holdback — money set aside for improvements — releases in pieces. Most deals use four to six draws. Each draw needs a documented package: invoices matched to the approved budget, an updated percent-complete schedule by trade, lien waivers, approved change orders, and a third-party inspection confirming the work is physically in place. Most commercial construction lenders build their paperwork around the AIA G702/G703 pairing. The G703 breaks the schedule of values into line items. The G702 summarizes the payment request. An architect or third-party inspector certifies the amount before any payment goes out (AIA Contract Documents). If an inspector’s on-site read of completion doesn’t match what the contractor claimed on the draw request, that gap gets flagged. The draw then stalls until someone resolves it.
Step 4: Retainage sits on top of the draw schedule, not inside it. Retainage is separate from the overall holdback. It’s a percentage withheld from each individual draw, not from the whole project upfront. Historically that number was 10%. Several states, including California and New York, now cap it around 5% by law (ConstructionCoverage). The retained percentage gets released at substantial or full completion, once punch-list items clear. Borrowers often confuse this with the construction holdback itself. But the two run on different timelines and serve different purposes.
Step 5: Builder’s risk insurance becomes a closing condition, even where no law demands it. Few places legally require this coverage. But almost every construction lender requires it anyway. The lender names itself loss payee or mortgagee. Depending on the site, the lender may also require flood or windstorm endorsements.
Step 6: Recourse runs closer to full than the marketing suggests. Construction-phase loans overwhelmingly carry a full personal guarantee. This keeps sponsor incentives aligned through completion and stabilization. Non-recourse structures stay reserved for stabilized, income-producing assets. Even loans advertised as non-recourse usually carry carve-outs — sometimes called a “bad boy guaranty.” These carve-outs bring back personal liability for specific triggers, like fraud, waste, or blocking lender inspections. And those carve-out lists have only gotten longer over time.
Key Terms Defined
Loan-to-Cost (LTC): the loan amount divided by total project cost — acquisition plus hard and soft construction costs. Lenders use this to size the loan during the build phase, before a reliable finished value exists.
Draw schedule: the sequence of scheduled payouts, usually four to six of them, released against verified work-in-place rather than in one lump sum at closing.
Retainage: a percentage — commonly 5% to 10% depending on the state — withheld from each individual draw and paid out at substantial completion. It’s separate from the overall construction holdback.
Recourse vs. non-recourse: recourse debt lets the lender go after the sponsor’s personal assets on default. Non-recourse debt limits that exposure to the collateral itself. Most non-recourse loans still carry carve-outs for fraud, waste, or covenant violations.
As-complete vs. upon-completion value: two different appraisal scenarios. One hypothetically values the building as if it’s finished today. The other is a forward-looking projection that assumes construction finishes on schedule, per the approved plans and budget.
The Structures and Leverage Tiers Available
Think of leverage in the hard money construction space as a ceiling, not a starting point. Across select lenders in Lendmire’s wholesale network, the top tier of construction and commercial hard money files can reach up to roughly 90% loan-to-value or loan-to-cost. But that ceiling is generally reserved for repeat sponsors with a completed-project track record and strong reserves. A first-time spec builder or a thinly capitalized sponsor should expect to land meaningfully lower once contingency and cost review get factored in.
| Tier | Typical Ceiling | Who It Fits |
|---|---|---|
| Standard build file | Sized to cost, with contingency held back | First or second ground-up project |
| Experienced-sponsor tier | Up to roughly 90% LTV/LTC | Repeat builders, documented project history |
| Overlay or complex file | Lower, case-by-case | Unusual property type, thin reserves, or credit exceptions |
Loan sizes across the network typically run from about $100,000 to $60,000,000. They span residential investment, multifamily, commercial, industrial, land, and ground-up construction collateral. Terms are shorter than permanent debt by design. Most bridge structures run six to twelve months. Select programs offer two-, three-, or five-year options, with interest-only structures available where the file supports it. Underwriting stays asset-based throughout: property value, sponsor equity, and exit strategy carry the weight. Credit minimums vary program to program, and some carry no fixed floor at all. But that flexibility never means a file skips underwriting entirely — stronger credit and a documented track record still open better terms.
Investors comparing structures across different hard money lenders for commercial property will usually find similar leverage ceilings. But reserve and experience requirements often differ file to file. That variance is normal in a private-capital market. It’s not a sign something’s wrong with a particular program.
A quick structural comparison against the alternatives:
| Factor | Hard Money Construction | Bank Construction Loan | Construction-to-Permanent |
|---|---|---|---|
| Underwriting basis | Asset, exit, sponsor experience | Sponsor financials, global cash flow | Sponsor financials + takeout terms |
| Documentation | Budget, plans, draw packages | Full financial package, covenants | Full package plus permanent-loan docs |
| Property flexibility | Wide — spec, value-add, unconventional | Narrower, conservative property types | Narrower, must qualify for takeout |
| Recourse | Typically full recourse | Typically full recourse | Often converts to non-recourse at stabilization |
For investors building purely residential product at a smaller scale, the mechanics work the same way but at a different size band. The hard money residential construction loans page walks through that version. The broader hard money commercial loans page covers stabilized commercial acquisition and bridge lending outside the ground-up context. The dedicated construction hard money overview goes deeper into ground-up-specific structuring across property types.
Where the General Rule Breaks
The final-phase LTV rule and the standard draw process cover most files. But a few situations bend that logic in ways worth knowing before they surprise a sponsor mid-project.
Tract and spec development doesn’t fit single-project underwriting. Some builders run several spec homes or small commercial units at once, under one program. Those deals don’t size cleanly against a single completed-value test. So lenders — and bank regulators, in their own guidance — treat multi-unit tract development as its own category. They calculate collateral value and loan-to-value across the whole portfolio of units, not one asset at a time.
Retainage math changes by state, independent of anything the lender decides. Several states cap retainage at 5%, while others still allow the historical 10%. Two nearly identical projects can end up with different draw math, purely based on where the dirt sits (ConstructionCoverage).
Non-recourse marketing rarely means what a borrower expects mid-construction. Even a loan structured as non-recourse for the permanent phase typically flips to full recourse during construction. Carve-out lists have expanded well past fraud and waste. They now include things like failing to deliver financials or blocking a property inspection. A sponsor who assumes “non-recourse” protects them through the build is usually wrong.
Using the wrong appraisal scenario mis-leverages the whole file. Confusing an as-complete opinion with a prospective upon-completion value is a known, recurring mistake. Loan sizing flows directly from that number. So the error compounds through every draw that follows (Dart Appraisal).
Cost overruns land on the sponsor, not the lender. Loans get sized to cost, with a contingency reserve baked in. Overruns beyond that reserve become the sponsor’s out-of-pocket problem mid-project. The loan doesn’t stretch just because the budget did.
Hard Money Now, DSCR Later: Planning the Exit
Hard money construction debt is built to be temporary. Once a project reaches a certificate of occupancy, leases up, or otherwise starts generating stabilized income, many investors refinance out of the construction loan. They move into longer-term financing sized against the property’s ongoing rental income, not the original project cost. That’s a DSCR loan — in Lendmire (NMLS# 2371349)’s case, arranged through select lenders across a wholesale network spanning 40 markets, including Washington, D.C. That shift matters because the underwriting basis changes completely. Construction debt gets judged on cost and completion. A DSCR takeout gets judged on whether the property’s income clears its own payment obligation. Lendmire’s complete DSCR loans guide covers that qualification logic in more detail — including how a coverage ratio, not a project budget, becomes the number that matters.
Lendmire is a mortgage broker. It doesn’t fund or underwrite these loans directly. Instead, it arranges placement through lenders in its network, and every scenario is subject to that lender’s own credit approval, property review, and program guidelines.
A file that clears construction-phase underwriting doesn’t automatically clear the takeout loan’s requirements. The property has to actually perform once leased or occupied. That’s a separate test entirely.
In practice, the construction files Lendmire sees run into trouble most often at the draw-package stage, not at closing. A missing lien waiver. A percent-complete figure that doesn’t match the inspector’s site read. A change order that wasn’t formally approved before work started. None of those are underwriting problems — they’re documentation problems. And they’re almost entirely avoidable with a disciplined draw process from the first request onward.
Tax treatment on a construction-to-DSCR transition can depend on how funds were used and how the property is titled. Investors should keep clean records and talk to a qualified tax professional before relying on any deduction assumption.
Loan approval is never guaranteed, and nothing here is a commitment to lend. Every scenario described here is general information subject to lender approval and to the specific borrower’s, property’s, and program’s guidelines at the time of application — not financial, legal, or tax advice.
Frequently Asked Questions
Can one loan fund both the land purchase and the vertical construction?
Yes, on many files. But the loan-to-value ceiling that applies to the whole loan is typically the ceiling for the finished project, not the raw land. Actual disbursements still stay capped to what’s been built at each stage, rather than getting released against the land purchase alone.
What happens if the project runs over budget mid-construction?
The sponsor typically covers the overrun out of pocket once the contingency reserve runs out. That’s because the loan is sized against the original budget and completed-value projection. Lenders generally don’t expand the loan amount mid-project without a formal re-underwrite.
Is a hard money commercial construction loan always full recourse?
Not always structured that way at origination, but expect it during the construction phase, no matter how the permanent-phase loan gets marketed. Full personal guarantees are common while the asset is unstabilized. Even nominally non-recourse structures carry carve-outs for issues like blocked inspections or missing financials.
Does a lower credit score disqualify a construction file?
Not automatically. Underwriting is asset-based first, and credit minimums vary by program — some carry no fixed floor at all. That said, stronger credit and a documented project history typically open better leverage and terms. So a thin credit file usually means a more conservative structure, not an outright decline.
Can retainage percentages differ between two nearly identical projects?
Yes. Retainage caps get set at the state level in many places. So a project in a 5% cap state and one in a state still allowing 10% will show different draw math, even with identical budgets and schedules.
If you’re financing a ground-up build or a major commercial renovation, and you want to see how leverage, sponsor experience, and exit strategy line up for your specific project, Lendmire can help. Its team can walk through the structure with lenders in its network based on the property, the budget, and your goals.
This article is for general informational purposes and does not constitute a commitment to lend, financial advice, legal advice, or tax advice. Loan programs, leverage limits, and eligibility criteria vary by lender, property type, sponsor experience, and market conditions, and are subject to change without notice. Speak with a qualified mortgage, legal, or tax professional before making financing decisions.
Program availability, loan terms, and eligibility are subject to lender guidelines, credit approval, property review, and full underwriting. This article is educational and is not a loan offer or commitment to lend.
Short-term financing tends to work best when the long-term plan is decided early – see refinancing out of a hard money loan with a DSCR loan.
About Lendmire
Lendmire, NMLS# 2371349, is a non-QM mortgage broker serving real estate investors in 40 markets, including Washington, D.C., through DSCR investor loan programs. Lendmire generally reviews qualification around the subject property’s rental income, not the borrower’s W-2 history. That makes it a practical fit for LLC-titled portfolios and self-employed investors. All scenarios remain subject to lender review and program guidelines. Lendmire has earned two consecutive Scotsman Guide Top Mortgage Workplace recognitions (2025, 2026).
Many investors treat hard money as the acquisition tool and plan the exit up front – see refinancing out of a hard money loan with a DSCR loan.
Lendmire’s Top Mortgage Workplace recognition is documented by Scotsman Guide 2025 Top Mortgage Workplace and Scotsman Guide 2026 Top Mortgage Workplace.
Investment Property Review
See how the DSCR math works for your investment property.
Lendmire can review rent, leverage, property type, and DSCR fit before you get too far into the deal.
Informational only. Not a Loan Estimate, approval, or commitment to lend. Program availability and eligibility are subject to lender guidelines, credit approval, property review, and underwriting.
References
1. FNRP — Loan-to-Value vs. Loan-to-Cost
2. Cornell Law School Legal Information Institute — 12 CFR Appendix A to Subpart D of Part 34
3. Dart Appraisal — Commercial Appraisal Value Scenarios
4. AIA Contract Documents — Instructions for G702
5. ConstructionCoverage — Retainage Glossary
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
- Mortgage Loan Originator · NMLS# 1129696 · Verify on NMLS Consumer Access
- North Carolina Real Estate Broker · License# 343312 · Verify on NCREC
- North Carolina Insurance Producer · License# 19053198 · Property, Casualty, Life, Health · Verify on NAIC SBS
- Lendmire LLC · Firm NMLS# 2371349 · Verify firm licensure
Disclosure information. Lendmire is a state-licensed mortgage brokerage under NMLS# 2371349. Lendmire is not a depository institution, direct lender, or financial advisor — all loans referenced are placed through wholesale lender partners and are subject to each lender's underwriting standards. This article is provided for general informational purposes and is not a commitment to lend, nor does it constitute financial, legal, or tax advice. Loan programs, terms, rates, and qualification standards change without notice and depend on borrower profile, property type, and the state in which the subject property is located. Equal Housing Opportunity provider. NMLS Consumer Access: nmlsconsumeraccess.org.
