Four questions come up on almost every builder call. Why do I have to pay so much at closing. Can I defer some of it. How do I get a higher LTC. And why am I paying interest on a house nobody lives in yet.
They sound like four problems. They are one: how much of your own cash is tied up between the first draw and the closing table. That number is what decides whether you run one house at a time or three, and it matters more to a small builder's growth than the rate does.
Here is the honest answer to each, with a worked example at the end, including the parts that work against us.
1. What you actually pay at closing, line by line
"Closing costs" is not one number. It is six or seven, and they behave completely differently. Lumping them together is why builders negotiate the wrong ones.
| Item | Typical size | Can you move it? |
|---|---|---|
| Equity injection (your cash into land and costs) | The largest item by far | Yes, in two ways: the LTC percentage, and what counts as cost. See section 2. |
| Lender points (origination) | 1% to 2% of the loan | Sometimes negotiable, often financeable, on some programs settled at payoff |
| Lender legal and document prep | Fixed dollar, modest | Rarely negotiable |
| Appraisal and feasibility / cost review | Fixed dollar | No. Third party, and you want it done properly. |
| Title, recording, transfer tax | Varies by state, can be significant | No. Statutory or near enough. |
| Prepaid builder's risk insurance | Modest, sometimes annual upfront | Shop it. Builders routinely overpay here. |
| Interest | Often the second largest item | Yes, and by more than you think. See section 3. |
The mistake: builders argue hard over a single lender point and accept the equity injection as fixed. The injection is usually ten to twenty times the size of the lender points, and it is the item most responsive to how the file is structured. You are haggling over the small number.
2. Same LTC, different cash. The soft costs question nobody asks.
Loan-to-cost is a percentage of whatever that particular lender counts as cost. And lenders define cost very differently.
- A narrow lender counts hard construction costs and land. That is it.
- A broader lender also admits soft costs: architectural and engineering, permits and impact fees, survey, legal, insurance, and financing costs.
So the first question to any construction lender is not "what is your LTC." It is "what is inside your cost basis." Compare those answers before comparing percentages, because until you do, the percentages are not comparable at all.
This is one of the specific reasons we place the program we do. The lender behind it takes a notably broader view of soft costs than most construction lenders. It is also the least visible advantage in any term sheet, because it never shows up as a number, only as the absence of one.
3. Two questions about interest that decide the real cost
Almost every builder shops the rate. Very few ask the two questions that actually move the number.
Question one: what is the interest charged on?
Most dedicated builder programs charge interest on the balance you have actually drawn. You draw $40,000 for site work, you are charged on $40,000, and the number climbs as the build consumes money.
The alternative is interest on the full committed amount from day one, drawn or not. Quote 11 percent and it is 11 percent on the whole loan, dollar one to the end. This is sometimes called a flat rate, or Dutch interest, and the word "Dutch" almost never appears in the document.
Worth knowing even though it is not the norm here. Full-commitment interest is far more common on fix and flip lending than on ground-up builder programs. If you do both, you will meet it, and it is expensive: on a $765,000 commitment over nine months the difference against a drawn-balance loan at the same rate runs to tens of thousands. Ask the question either way, in these words: is interest calculated on the committed amount or on the outstanding balance?
Note this is about calculation, not billing frequency. A lender can invoice monthly and still be charging on the full commitment. And where a lender funds an interest reserve out of the loan on a full-commitment structure, it gets worse rather than better: the reserve is added to the committed amount, and the rate is then charged on the larger figure.
Question two: when do you actually pay it?
This is the one that decides how many homes you can run, and it is separate from the calculation entirely.
Most builder loans accrue interest on the drawn balance and then bill you for it every month. The cost is reasonable and the structure is fair, but the money comes out of your working capital during the build, month after month, while the house produces nothing.
The alternative is a structure with no monthly payment at all, where the interest accrues and is settled at maturity out of sale proceeds. The interest still gets paid. What changes is whose cash carries it in the meantime, and for a builder trying to run two or three homes at once that is the whole ballgame.
Section 7 puts numbers on both.
So put it to any construction lender in these words: is interest calculated on the committed amount or on the outstanding balance? It is a fair question with a one-word answer, and a lender who will not answer it plainly has told you something.
Worth knowing separately: pricing in this part of the market commonly runs 10 to 13 percent. The program we place starts under 8 percent. So on a like-for-like file the gap a builder actually experiences tends to be wider than the calculation method alone would suggest.
Why you cannot simply pay it monthly
Builders often ask to just pay the interest along the way and keep the loan clean. On a drawn-balance structure that is harder than it sounds, and on the program we place it is not offered at all.
The reason is arithmetic. When interest is charged only on funds actually used, the amount changes every single month, because your outstanding balance changes every time a draw funds. There is no level payment to set up. Servicing that as a monthly bill against a moving balance, across a build schedule that itself moves, is complicated enough that the program handles it differently: the interest accrues and is settled out of the sale proceeds.
Which is the right trade for most builders, because it is the same feature that makes drawn-balance interest cheap. You are not paying on money you have not spent.
4. What can be deferred, and what deferring actually costs you
More than builders assume. Lender points can frequently be financed into the loan rather than paid in cash, and on some programs they are settled at payoff instead of collected at closing.
But here is the trade that almost nobody explains at the table.
Anything you finance becomes part of total project cost, and total project cost is the denominator of loan-to-cost. Deferring cash today lowers your borrowing ceiling tomorrow. On a tight file, financing your lender points can push you through the LTC cap and force a larger equity injection than the lender points you were trying to avoid.
So the question is never "can I defer this." It is "does deferring this leave me inside the cap." On a file with room, deferring is close to free and you should do it. On a file at the ceiling, paying cash for the small items protects the big one. Work it out before you ask, not after.
5. How to actually get a higher LTC
In rough order of what genuinely moves the number:
- Get more soft costs admitted into the basis. Section 2. First because it is the biggest and the least contested, and most builders never raise it.
- A documented schedule of completed projects, and this is worth more than most builders imagine. Construction lenders tier borrowers by experience, and the tiers are not subtle. A typical matrix runs from a top band at 90 percent loan-to-cost for a builder with 100 or more homes sold, down to 70 percent for a builder with two. That is twenty points of LTC, decided entirely by what you can evidence. On a $1,000,000 project that is $200,000 of your own cash, and the only difference between the two builders may be that one produced the list and the other did not.
Most lenders ask how many projects you have completed, not how many you owned. A builder with a hundred client jobs and two of his own is not a first-time sponsor, but he gets priced as one because nobody ever asked him for the schedule. Address, scope, contract value, start and completion dates, as far back as you can reasonably reconstruct. - Land already owned and seasoned. Its equity can count toward your injection rather than sitting as dead cost. How much credit you get depends on how long you have held it and how it is valued.
- A signed presale or contract. Nothing de-risks a spec file faster than a buyer already attached to it.
- Verifiable liquidity after closing. Not liquidity before. Lenders want to see what is left once you have funded the injection, because that is what absorbs an overrun.
- A contingency that survives third-party cost review. A budget with a thin or absent contingency reads as inexperience and gets the whole file marked down, which costs you more LTC than the contingency would have.
6. The number you are probably negotiating is the wrong one
Almost every construction lender caps on two numbers at once: loan-to-cost, and loan-to-value against the finished appraised value. They fund the lower of the two.
Which means on a project where the build cost is high relative to what the finished house will actually appraise for in that neighborhood, the finished value cap binds first and a higher LTC approval changes nothing at all. You can win the LTC argument and get exactly the same loan.
Before you spend leverage, work out which cap is binding on your file. If it is the value side, the productive conversation is about the appraisal, the comparables, and the spec level of the build, not about LTC.
7. A worked example: the same house, two lenders
One spec build, nine months start to finish. Identical project, identical builder, identical 85 percent loan-to-cost. What differs is what counts as cost, how interest is calculated, the rate, and when the lender points are collected. These are real market structures, not strawmen.
| The project | Amount |
|---|---|
| Land | $200,000 |
| Hard construction costs | $700,000 |
| Soft costs (A&E, permits, impact fees, survey, legal, insurance) | $120,000 |
| Total real project cost | $1,020,000 |
| Expected sale price | $1,400,000 |
Lender A: narrow cost basis, 10% on drawn funds, billed monthly, lender points at closing
A perfectly reasonable mainstream builder loan. Nothing predatory about it.
| Line | Amount |
|---|---|
| Cost basis they recognize (land + hard only) | $900,000 |
| Loan at 85% of that basis | $765,000 |
| Lender points at 2%, paid cash at closing | $15,300 |
| Interest at 10% on drawn balances across 9 months billed to you every month while you build | $36,564 |
| Cash at closing ($1,020,000 project cost less the $765,000 loan, plus lender points) | $270,300 |
| Plus interest paid out of pocket during the build | $36,564 |
| Total cash committed before the house sells | $306,864 |
Lender B: broad cost basis, interest on drawn funds only, interest and lender points settled at maturity
Rate starts at 7.99 percent in month one and steps up half a point a month, capped at 10.99 percent. Lender points are 2 percent, paid at maturity rather than closing. No monthly payments at all.
| Line | Amount |
|---|---|
| Cost basis they recognize (land + hard + soft) | $1,020,000 |
| Loan at 85% of that basis | $867,000 |
| Lender points at 2%, paid at maturity not at closing | $0 today |
| Interest on drawn funds, settled at maturity not monthly | $0 today |
| Cash at closing | $153,000 |
| Plus interest paid out of pocket during the build | $0 |
| Total cash committed before the house sells | $153,000 |
| Interest accrued and settled at maturity, from sale proceeds | $41,608 |
Where that $41,608 comes from
An escalating rate is impossible to eyeball, so here is the whole calculation. Land funds at closing. The $667,000 of construction money draws on a normal curve, slow at first, peaking mid-project, tapering at the end. Interest each month is charged on the balance actually outstanding that month, at that month's rate.
| Month | Draw | Balance at month end | Rate | Interest |
|---|---|---|---|---|
| Closing | $200,000 | $200,000 | — | — |
| 1 | $26,680 | $226,680 | 7.99% | $1,420 |
| 2 | $53,360 | $280,040 | 8.49% | $1,793 |
| 3 | $86,710 | $366,750 | 8.99% | $2,423 |
| 4 | $113,390 | $480,140 | 9.49% | $3,349 |
| 5 | $120,060 | $600,200 | 9.99% | $4,497 |
| 6 | $113,390 | $713,590 | 10.49% | $5,742 |
| 7 | $86,710 | $800,300 | 10.99% | $6,932 |
| 8 | $53,360 | $853,660 | 10.99% cap | $7,573 |
| 9 | $13,340 | $867,000 | 10.99% cap | $7,879 |
| Total | $867,000 | — | — | $41,608 |
The escalator has a second edge and it is worth saying plainly. The cheap rate sits on your low balances and the expensive rate on your high ones, so the rate advantage narrows as the build progresses and disappears once you reach the 10.99 percent cap. The structure rewards builders who finish on schedule. If yours habitually run long, model it at the cap before you compare anything.
Each month's interest is the average of that month's opening and closing balance, multiplied by one twelfth of the annual rate, which is how a drawn-balance lender bills it. Your actual draw schedule will differ, and so will the total. The shape is what matters.
Read that honestly, because it is the real trade. Lender B is not cheaper. It costs about five thousand dollars more in interest across the build. What it does is leave $153,864 of your cash in your account until the house sells, instead of taking $15,300 at closing and then billing you every month while nothing is finished.
Three things create that gap, and they are worth separating because they are different levers.
| Source of the difference | Amount |
|---|---|
| Broader cost basis. Admitting soft costs moved the loan from $765,000 to $867,000, so you fund $102,000 less of the project yourself | $102,000 |
| Lender points settled at maturity rather than collected in cash at closing | $15,300 |
| No monthly interest billed during the build | $36,564 |
| Total cash left in your account until the house sells | $153,864 |
Not one of those three is the interest rate.
So the question is not which loan is cheaper. It is what $153,864 of freed cash is worth to you over nine months. For a builder running one house at a time with money in the bank, possibly not five thousand dollars. For a builder who could put that into a second build, it is not close.
Illustrative only. Assumes a nine month schedule, land funding at closing, and construction draws building to a mid-project peak then tapering, which is the normal shape. Lender points at 2 percent and no overrun. "Cash at closing" is stated the way an equity injection is normally quoted, total project cost less the loan, though in practice you fund land and closing costs first and the balance as the build draws. Title, transfer tax, appraisal and insurance are excluded from both columns since they are broadly the same either way. Real files vary on every one of these.
8. Where this fits, and where it does not
NTIB places a construction program for builders running a handful of homes at a time. The structure:
- Interest only on funds actually drawn, not flat on the full commitment
- No monthly payments at all. Interest and lender points are both settled at maturity, out of sale proceeds
- Rate starts at 7.99 percent, steps up half a point a month, capped at 10.99 percent
- Lender points 2 percent, paid at maturity rather than at closing
- Initial term of 10 or 12 months, with a 4 month extension option
- Loan-to-cost is tiered by your track record, and land subordination can lift it further
- A broader cost basis than most, which is the section 2 advantage
Availability and maximum loan size vary, and not every state is served. We will tell you where you land before you spend time on it.
Now the honest part.
The deferral is not free money and nobody should tell you it is. The interest and the lender points still accrue and they still get paid, out of sale proceeds instead of your working capital. Deferral changes timing. What changes the actual amount is the drawn-balance calculation and the broader cost basis. Keep those two ideas separate when anyone is selling you something.
This structure is worth a great deal if your constraint is how many homes you can carry at once, or if your cash is already committed across two or three builds. The freed working capital is the product. The interest cost is slightly higher and you should expect that.
It is worth much less if you have a strong cash position and build one house at a time. If monthly interest payments are a mild annoyance rather than a constraint, a conventional builder loan will cost you less and you should take it. And it is worth less again if your builds habitually run long, because the escalator and the cap will catch you. If that is you, we will say so on the first call rather than waste your time.
Not every builder qualifies, and not every project fits. The first conversation and the review are free, and if we place financing we charge a small fee at closing, disclosed upfront.
Questions builders ask
What is Dutch interest on a construction loan?
Dutch interest, usually quoted as a flat rate, means the lender charges interest on the entire committed loan amount from closing until repayment, whether or not the money has been drawn. Quote 11 percent and it is 11 percent on the whole loan, dollar one to the end. This is the normal structure in construction lending. The alternative is interest on funds actually outstanding, which rises as you draw. On a $900,000 commitment at 9 percent over nine months, the full-commitment method costs about $60,750 against roughly $35,000 on drawn funds. An interest reserve makes a flat structure worse, not better, because the reserve is added to the loan and the flat rate is charged on the larger amount. This is about calculation, not timing: a lender can bill you monthly and still charge on the full commitment. Ask directly whether interest is calculated on the committed amount or the outstanding balance.
Why do I have to pay so much cash at closing?
Closing cash is not one number, it is six or seven: lender points, lender legal and documents, appraisal and feasibility, title and recording, transfer tax, prepaid builder's risk, and the equity injection. The injection is almost always the largest and it is the one governed by loan-to-cost. The fee items are comparatively small and several are negotiable or financeable. Most builders argue about the fees and accept the injection, which is the wrong way round.
Two lenders quoted me the same LTC. Why is the cash to close so different?
Because loan-to-cost is a percentage of whatever that lender counts as cost, and lenders define cost very differently. A narrow lender counts hard construction costs and land. A broader one also admits soft costs: architectural and engineering, permits and impact fees, survey, legal, insurance, and financing costs. Every soft cost dollar admitted becomes financeable instead of coming out of your pocket, and it raises the denominator the percentage applies to. Ask what is inside the cost basis before comparing percentages.
Can I defer or finance my closing costs?
Often yes. Lender points can frequently be financed into the loan, and some programs settle them at payoff. The catch is that anything financed becomes part of total project cost, and total project cost is the denominator of loan-to-cost. Deferring cash today lowers your ceiling tomorrow, and on a tight file it can force a larger equity injection than the lender points were worth.
Can I just pay the interest monthly and keep it clean?
With most builder lenders, yes, and you will be billed for it whether you want to be or not. On the program we place it is not offered: interest accrues on what you have actually drawn and is settled at maturity. The reason is arithmetic. When interest is charged on the drawn balance, the amount changes every month as draws fund, so there is no level payment to set up against a build schedule that is itself moving. The trade is that nothing comes out of your pocket while you build.
How do I get a higher LTC?
Get more soft costs admitted into the cost basis, produce a documented schedule of completed projects, use land you already own and have seasoned, bring a signed presale, show verifiable liquidity after closing, and carry a contingency that survives third-party cost review. The completed-project schedule is the most under-used, because lenders ask how many projects you have completed rather than how many you owned, and most builders have never been asked to produce the list.
Is LTC really what is limiting my loan?
Usually not. Lenders cap on loan-to-cost and on loan-to-value against finished appraised value, and fund the lower of the two. Where build cost is high relative to the neighborhood, the value cap binds first and a higher LTC approval changes nothing. Find out which one is binding before spending your leverage.
Is deferred interest free money?
No, and on our worked example it costs about $5,000 more in total interest than a conventional builder loan. What it does is leave roughly $154,000 of your cash in your account until the house sells. Deferral changes timing and nothing else. Whether that trade is worth it depends entirely on what you would do with the freed cash. Be suspicious of anyone who presents it as cheaper rather than as a trade.
Does an escalating rate work for me or against me?
Both ways, and it is worth understanding rather than fearing. The cheap months are the early ones, when you are drawing least, so the low rate sits on low balances. By the time the balance is large you are at or near the cap. Over a nine month build starting at 7.99 percent and capping at 10.99, the total lands close to what a flat 10 percent lender would charge on the same drawn balances.
So the escalator is not really where the money is. It is an incentive to finish on schedule, and if your builds habitually run long you should model it at the cap rather than at the headline rate. The genuine differences on this program are the broader cost basis and the absence of any monthly payment.