A rehab loan finances improvements to an existing building. A ground-up loan finances a new building from a vacant or cleared site. Both release funds in stages, but they carry different risks, and lenders underwrite them differently.
Our construction program covers both, with loans up to 90% of construction cost and amounts up to $75 million. Here is how the two compare and when each fits.
What each loan is for
Rehab projects start with a structure that already exists. The work might be cosmetic, a major renovation, or a repositioning of an older property. Ground-up projects start with land, plans and permits, and end with a new structure that did not exist when the loan began.
Valuation: as-is versus completed
Valuation is where the two diverge most clearly.
- Rehab. The lender looks at the property's current as-is value and its projected value after the work. The existing building gives the lender something to value today, and part of the collateral is already in place.
- Ground-up. At closing the collateral is mostly land. Value builds as construction proceeds, and the projected completed value depends on the plans and the finished product. More of the value is projection.
Because more is projected, ground-up underwriting leans harder on the budget, the plans and the people building. See how private lenders value a property for more on valuation.
Key takeaways
- Rehab starts with an existing, valued building; ground-up starts mostly with land and a plan.
- Ground-up has more unknowns, such as permits, site work and a longer schedule, so lenders review the budget, plans and builder more closely.
- Both release funds against completed work through draws.
- Choose by the work involved, not by which loan sounds simpler.
Risk and where it comes from
Rehab risk is mostly hidden conditions. Older buildings can reveal problems once walls are opened, so a rehab budget needs a thoughtful contingency. Scope creep is the other common issue.
Ground-up risk is broader. Permits and approvals, site conditions, weather, the cost of materials and labor over a longer period, and the schedule all feed into it. The project also has no income until it is finished. A lender looks for cushion across all of those: contingency, an interest reserve, and borrower capacity. Our article on contingency and interest reserve explains these.
Timeline and documentation
Rehab projects are often shorter and need less paperwork to begin: the existing property, a scope of work, a budget and a contractor. Permits may still be required depending on the work.
Ground-up projects usually need more: plans, permit status or timeline, a detailed budget with bids, contractor information, and a clear view of the site and title. Minimal or no-doc options are available in our program where the deal supports it, but we review every application individually and do not assume it.
The exit
Both need a defined way to repay the loan: a sale, a refinance, or, in our construction program, conversion to a permanent loan at conventional rates on completion. Ground-up projects that end as income property, such as apartments, may also need to reach stabilization first. Compare with bridge-to-permanent conversion.
When each fits
- Choose rehab financing when a suitable building already exists, the improvements are the main task, and the as-is value gives a solid starting point.
- Choose ground-up financing when the best use is a new building, the site is controlled, and plans, budget and builder are in place.
- Talk to us first when the project is in between, such as a gut renovation with an addition, or a teardown and rebuild. Those are underwritten on their facts.
Timing and costs
We can offer approval in as little as 24 hours and funding in as little as seven days, subject to a complete file, underwriting, title review and property valuation. Ground-up files typically take longer to review, and approval is not guaranteed.
Construction financing generally costs more than a long-term bank loan, so compare total cost over the build period and ask for every cost in writing.
This article is general information only, not legal, tax or investment advice.
Not sure which structure fits your project? Read about our construction loans, call (800) 943-1314 or apply online.
Published by the US Lending & Company underwriting desk. General information only — not legal, tax or investment advice.