Construction Loans 101: How to Finance Your Next Build in Washington

You've got land. You've got plans. You've got a contractor. But construction financing is nothing like regular mortgage lending.

Construction loans typically require 30-35% down (loan-to-cost basis), fund via draws tied to construction progress, and charge 8-10% during the build phase. The biggest surprise most builders face: construction loans aren't about long-term fixed payments. They're about draws, inspections, contingencies, and managing interest reserves. You'll draw funds as construction progresses, not get a lump sum at closing.

I've closed construction deals in Washington — duplexes, multi-unit residential builds, spec projects. I've seen deals break because the builder didn't understand draws. I've seen projects stall because the interest reserve ran dry.

Here's how construction loans actually work and what you need to know before you start building.

How Do Construction Loans Work?

Construction loans are bridge financing. You borrow based on a percentage of construction cost (not the finished property value), draw funds as the project progresses, and refinance to permanent financing when the project is complete.

Timeline:

• Months 1-3: Pre-construction, planning, permitting
• Months 4-18: Construction phase, monthly draws, lender inspections
• Month 19-24: Construction complete, permanent refinance (or sale)

Funding structure:

• You put down cash (30-35% of total project cost for residential)
• Lender provides the rest as draws tied to construction progress
• Each draw is inspected and verified
• Monthly interest accrues on the outstanding loan balance
• At completion, you refinance to a permanent loan (or sell)

What Is Loan-to-Cost (LTC) in Construction Financing?

Construction loans use LTC (loan-to-cost), not LTV (loan-to-value).

LTC = Total Loan Amount / Total Project Cost

Example:

Total project cost (land + construction): $1,000,000 Down payment (your equity): $350,000 (35%) Loan amount: $650,000 LTC: 65%

This is at the ceiling for most construction lenders. Higher LTC (70-80%) is possible but rare, and requires stronger sponsor strength and builder experience.

Why LTC, not LTV? Because the property doesn't exist yet. You can't appraise what hasn't been built. Lenders base approval on cost, not value. The property value is a pro-forma estimate. Cost is actual. Learn how down payment requirements vary across loan types.

Construction Loan Draw Process

This is where most borrowers get surprised. You don't get the money upfront.

Month 1: Close on construction loan. Lender typically holds back 10% as a retainage. You get 90% of the first draw (if first draw is 20% of total loan, you get 18%).

Month 2-18: As work progresses, you submit a draw request. Lender's inspector visits the site and verifies that work has been completed. Once approved, you get the draw (minus retainage).

Typical draw schedule:

• 20% upon start
• 20% at foundation/framing complete
• 20% at rough-ins (mechanical, electrical, plumbing)
• 20% at drywall/interior
• 20% at completion (after final inspection, retainage release)

What slows down draws:

• Inspector can't access site (weather, security)
• Work quality doesn't match draw request (builder claims 30% done, inspector says 20%)
• Permit issues or code violations
• Lien notices or contractor disputes
• Budget overruns (if the project is running over, lender might not fund the full draw)

Plan for 3-5 business days between draw request and funding. This matters when you're trying to pay contractors on schedule.

Interest Reserves

Here's where construction loans cost real money: interest reserves.

During construction, the property isn't generating income. You're not making permanent mortgage payments. But the loan is outstanding and accruing interest.

Lenders build an "interest reserve" into the loan at closing. It's held in an account and drawn down monthly as interest accrues.

Example:

Total loan: $650,000 at 8.0% interest Construction timeline: 18 months Monthly interest: ~$4,333 Interest reserve: $4,333 × 18 = $78,000

That $78,000 is built into your total loan, but it's held by the lender and paid down as interest accrues. If construction takes longer than expected, the interest reserve can run dry and you'll need to inject cash. Understand the full cash-in required for acquisitions.

Real risk: If your 18-month build takes 24 months (weather delays, permit delays, contractor issues), your interest reserve for 18 months doesn't cover 24. You either inject cash or delay payment to contractors.

Build conservative timelines. If you think it's 18 months, budget 22 months.

Construction-to-Permanent (CTC) Loans

Most construction loans convert to permanent financing at project completion. This is called a construction-to-permanent (CTC) loan.

How it works:

You finance construction at 8-10% for 18-24 months. Upon completion and lease-up (for multifamily) or sale (for spec/single-family), it converts to permanent financing at 5.5-7.0% for 25-30 years.

The advantage: you lock in permanent financing terms at the time you close the construction loan. Rates could move, but your permanent terms are set. No re-underwriting, no new appraisal (usually).

The disadvantage: conversion requires the property to meet permanent financing standards (occupancy rate, rent roll, lease agreements). If the project doesn't perform, permanent financing might not be available or might be on worse terms.

Typical permanent financing conversions:

• Stabilized multifamily (85%+ occupied): Conventional or SBA permanent financing, 5.5-6.5% rates
• Spec single-family: Sale to owner-occupant (who gets their own financing)
• Development land: Refinance to an investor or development lender (usually stays short-term)

What Lenders Need to Approve Construction Financing

Before you close on a construction loan, lenders need:

Land and Plans

• Deed or purchase agreement (clear title, no liens)
• Preliminary environmental assessment (Phase I)
• Site survey
• Architectural/engineering plans (fully permitted or near-permitted)
• Zoning letter confirming allowed use

Budget and Timeline

• Detailed construction cost estimate (line-by-line, not "contingency")
• Contractor bid (or certified estimate if you're self-building)
• Timeline from start to completion
• Contingency budget (usually 5-10% for overruns)

Contractor Information

• General contractor licensing and bonding
• References and past projects (with verification)
• For first-time builders, sometimes lenders require experienced GC or builder oversight

Sponsor/Builder Credentials

• Personal credit (usually 680+ minimum)
• Liquidity ($50K-$200K depending on project size)
• Experience in construction (if first-time builder, some lenders require higher reserves or GC oversight)
• Personal financial statement

Additional

• Appraisal or cost analysis (pro-forma value of finished project)
• Debt schedule (other loans, guarantees)
• Construction draw schedule and timeline

Common Construction Loan Mistakes

Mistake 1: Underestimating project cost

Construction always costs more than budgeted. Contingency is real. If your estimate is $500K, budget $550K. The lender will use the higher number for LTC anyway.

Mistake 2: Overstating your experience

First-time builders are approved, but lenders know the risk. They might require higher down payment, experienced GC oversight, or construction manager involvement. Be honest about experience. Overstating it kills credibility.

Mistake 3: Underestimating timeline

18-month build takes 24 months. Permits are delayed, weather stops work, contractor schedules slip. Your interest reserve was calculated for 18. Now you're out of money.

Add 3-4 months to your internal timeline estimate when submitting to lenders. Better to finish early and save interest than finish late and scramble for cash.

Mistake 4: Not budgeting for architectural/engineering fees

Plans cost money. Permit expediting costs money. Soil testing, surveying, environmental reports — these add up to 5-10% of construction cost before you turn the first shovel.

Mistake 5: Choosing a contractor based on price alone

Lowest bid is often a sign of an underbid project. That contractor cuts corners, misses timelines, or goes out of business. Get references. Verify past projects. Higher bid for a reliable GC is insurance.

Mistake 6: Treating construction draws casually

Submit draws on schedule. If you miss a month, your timeline slips and so does your completion date. If your interest reserve runs dry mid-project, you're in trouble.

Washington-Specific Construction Financing Notes

Washington doesn't have statewide restrictions on construction lending, but there are regional considerations:

Seattle/King County market: More competitive, multiple lenders, tighter underwriting. Spec projects face skepticism; owner-occupied builds are easier.

Secondary markets (Spokane, Tacoma): Less competitive, fewer lenders, but more flexibility on timeline and contractor experience.

Permitting timeline: Washington permitting varies by county. King County can be 60-90 days for single-family; some rural counties are 30 days. Build this into your timeline.

Environmental: King County and Puget Sound have environmental scrutiny (wetlands, critical areas). Budget for Phase I environmental and permitting time.

Labor costs: Washington labor is expensive (prevailing wage on public projects, tight labor market). Make sure your budget reflects current rates.

Types of Construction Projects Lenders Like

Most favorable:

• Single-family residential (owner-built or spec)
• Duplex or triplex (owner-occupied with investment potential)
• Commercial renovation (existing permitted use)

Standard:

• Multi-unit residential (4-10 units)
• Mixed-use (residential + retail)
• Industrial or warehouse spec

More difficult:

• Adaptive reuse (changing building use)
• Highly specialized (medical, data center, manufacturing)
• Development land (no construction, just holding)

I've closed duplexes and multi-unit residential builds in Washington. I know the regional lenders and their appetites. If your project is in a tougher category, we can find the right fit, but it might take more legwork.

Real Example: Washington Construction Financing

Here's a simplified construction deal I closed:

The deal:

• Duplex build in King County
• Land cost: $200K
• Construction cost (GC bid): $400K
• Total project cost: $600K
• Down payment: $210K (35%)
• Loan amount: $390K
• LTC: 65%

Interest reserve:

• Loan rate: 8.5% during construction
• Timeline: 16 months
• Monthly interest: ~$2,760
• Interest reserve: ~$44K (built into loan)

Total borrowing: $390K loan + $44K reserve = $434K closed

Draw schedule:

• Month 1: $78K (20% of loan)
• Month 4: $78K (20%)
• Month 8: $78K (20%)
• Month 13: $78K (20%)
• Month 16: $78K (20%)

Construction-to-permanent conversion:

• Upon completion: refinance to conventional permanent loan
• Finished duplex appraised at $850K
• Permanent financing: $350K at 6.25% for 30 years
• Rate payoff: construction loan (8.5%) done, permanent loan (6.25%) begins

This deal closed on time, the duplex appraised higher than the estimate, and the builder refinanced to conventional permanent financing at a great rate.

The Bottom Line on Construction Loans

Construction financing works differently than permanent financing. You're borrowing based on cost, not value. You draw funds as work completes. You pay interest on an outstanding balance. You refinance when done.

The key risks: overruns, delays, contractor issues, and interest reserve depletion. Plan conservatively. Budget for 20-30% more than the GC bid (soft costs, contingency, permitting). Add 3-4 months to your timeline estimate.

Washington has good construction lending options. King County is competitive; secondary markets are more flexible. The right lender for your project depends on project type, sponsor experience, and timeline. Bridge loans can also work for construction-to-permanent conversion.

If you're building in Washington and you need construction financing, let's talk through the deal, the timeline, and the right structure.