Size Funding and Plan Draw Liquidity
Construction loans commonly apply more than one leverage test. Loan-to-cost compares the commitment with eligible project costs; loan-to-as-completed-value compares it with the supported finished value. An acceptable result on one test does not override another. The lender may also impose acquisition or land limits, experience requirements and minimum equity contributions.
After sizing, map when the funds actually become available. Some structures require borrower equity to be invested first. Others fund proportionally or according to defined milestones. Draws usually rely on documented eligible work and inspections, and the lender may retain part of a request. Cash sufficient for closing can still be insufficient for the first month of construction.
Use a staged forecast rather than treating the full commitment as a bank balance. Track contractor payments, borrower equity, loan disbursements, remaining commitments and unspent contingency. Ask whether interest accrues on disbursed funds, how interest reserves operate and how inspection fees are paid. Lender review of progress is a funding control; it does not replace your own quality oversight. A lender-approved draw should not be interpreted as a warranty of workmanship or proof that local code requirements have been satisfied.
Worked example
Eligible costs are $480,000 and completed value $600,000. Illustrative limits of 75% LTC and 65% LTACV allow $360,000 and $390,000 respectively. The lower cap is $360,000 before other rules. A portion may remain undisbursed until work is verified, so closing proceeds will be lower.
Mini glossary
- LTC
- Loan commitment divided by eligible project cost.
- LTACV
- Loan commitment divided by accepted as-completed value.
- Equity-first
- Funding sequence requiring specified borrower capital before loan draws.
Put it into practice
Calculate both leverage tests using the same defined loan balance. Create a monthly disbursement forecast and delay one inspection cycle. Mark the largest projected cash gap. Request the lender’s equity contribution rules, draw checklist, retainage policy and procedure for cost overruns in writing.
Recommended reading
Use these primary sources for context. Individual lender requirements can change; confirm the current program for your transaction.