A residential builder picks a construction lender based on the project, not on a general preference. A spec build aimed at a quick turn into the resale market has different financing needs than a custom home for an end client on a 14-month timeline. The two main options for residential construction financing in 2026 are bank construction loans, including community banks, regional banks, and credit unions, and hard-money construction loans, also called private money or asset-based lending. Each fits a particular kind of project and each costs the builder differently.
The choice is not abstract. The wrong lender for a given project costs the builder either in rate, in retainage drag, in draw cycle friction, or in prepayment penalties. Understanding where each lender shines and where each struggles is part of running a build profitably.
Rate spread
In 2026, bank construction loans for qualified residential builders price at roughly 7% to 9%, depending on the prime rate, the builder’s balance sheet, the deal’s loan-to-cost, and the local lender’s competition. Hard-money construction loans price at 11% to 14%, with origination fees of 2 to 3 points on top of the rate. The all-in cost of hard money on a 12-month build runs roughly 13% to 17% effective once origination is amortized into the rate.
On a $430,250 build with $300,000 outstanding on average over a 7-month construction period, the bank loan at 8% costs roughly $14,000 in interest. The hard-money loan at 13% with 2.5 points costs roughly $30,500 over the same period. The $16,500 spread is the price of the differences in process, speed, and flexibility that hard money offers and that the bank does not.
Draw cycle differences
Bank draws are document-heavy and run on a predictable monthly cycle. The builder submits the AIA G702 application for payment, the G703 schedule of values, the photo bundle, the paid invoices, the vendor lien waivers, and the inspection report. The bank’s draw analyst reviews the package, the third-party inspector visits the site, the bank’s underwriting signs off, and the funds wire 7 to 14 business days after submission. A builder with a clean package and a responsive lender funds draws on a roughly 10-day cycle. A builder with sloppy documentation runs a 21-day cycle and absorbs the working-capital cost.
Hard-money draws are photo-driven and faster. The builder submits a draw request with photos of work in place, a brief narrative of what was completed since the last draw, and updated cost-to-complete figures. The hard-money lender reviews the photos, sometimes does a windshield drive-by instead of a formal inspection, and wires within 3 to 5 business days. The cycle is faster because the documentation burden is lower, which is the same reason the cycle costs more in interest.
| Aspect | Bank | Hard money |
|---|---|---|
| Rate range | 7–9% | 11–14% plus 2–3 points |
| Draw cycle | 7–14 business days | 3–5 business days |
| Draw documentation | Full G702/G703, lien waivers, COI | Photos, brief narrative, cost-to-complete |
| Retainage | 10% standard, sometimes 5% after midpoint | Often 0%, sometimes 5% |
| Inspection | Third-party, every draw | Self-inspection or drive-by |
| Term length | 12–18 months | 6–9 months |
| Prepay penalty | Usually none | 3–6 month minimum interest |
Retainage practice
Bank construction loans almost always hold retainage, typically 10% on every draw, sometimes stepped down to 5% after the project is 50% complete. The retainage releases at substantial completion, certificate of occupancy, and final lien waiver collection. On a $430,250 build, the bank holds up to $43,025 across the build that the builder cannot access until project close.
Hard-money lenders frequently waive retainage entirely, especially on spec-build construction loans where the builder owns the property and the lender holds first mortgage. The hard-money model treats the property itself as the collateral, with the loan-to-value ratio set conservatively enough that retainage is not necessary. Some hard-money lenders hold a small retainage of 5% as a final-draw item, but the cash-flow advantage relative to bank lending is real.
On a builder running thin on working capital, the retainage difference alone can change which lender fits the project. The $43,025 the bank holds on the 926 Stratford build is real cash the builder cannot deploy on the next project. Hard money returns that capital to circulation, at the cost of the higher interest rate.
Inspection cadence
Bank construction loans use third-party inspectors, contracted by the bank and paid out of a draw fee or charged separately to the borrower. The inspector visits the site every draw, walks the work in place, takes independent photos, and submits a report with a percentage-complete figure per major line item. The inspector’s number is what the bank uses to validate the builder’s claim of percentage complete. If the inspector and the builder disagree, the bank funds the inspector’s number.
Hard-money inspections are lighter or absent. Many hard-money lenders rely on the builder’s photos and a periodic drive-by from the lender’s representative. Some skip the drive-by entirely on smaller deals, especially when the lender has a relationship with the builder and the loan-to-value is conservative. The inspection saving is real for the builder, both in time and in friction, and it shifts the underwriting risk toward the lender, which the lender prices into the rate.
Term length
Bank construction loans typically run 12 to 18 months, with extensions available at the bank’s discretion if the build runs over. The longer term is helpful on custom builds where weather, change orders, or owner-driven scope changes can extend the timeline. The cost of the longer term is interest carry, but the rate is low enough that the carry is manageable.
Hard-money loans typically run 6 to 9 months. The shorter term forces the builder to either deliver fast or refinance, and refinancing carries fees. On a spec build aimed at a 5-month construction window with a 60-day marketing window, the 9-month hard-money term fits the project. On a custom build with a 12-month timeline, the hard-money term will run out before the build delivers, which means the builder is paying extension fees or refinancing into a permanent loan before the project is finished. The mismatch is what makes hard money expensive on the wrong project.
Prepay penalty differences
Bank construction loans usually have no prepayment penalty. The builder can pay off the loan early, at substantial completion or at the conversion to a permanent mortgage, without a fee. This matters when the spec sells before the construction loan term is up or when the owner closes the permanent financing earlier than expected.
Hard-money loans often carry a minimum interest period of 3 to 6 months, meaning the builder pays at least that many months of interest even if the loan is paid off in month 2. On a fast-moving spec, this is a real cost. A builder who funds in March, completes in June, and sells in July pays five months of interest under a hard-money minimum, even though the loan was outstanding for only four months. The minimum interest period is usually disclosed up front and can be negotiated, but it is rarely waived.
When to use each
Spec builds with quick turn windows fit hard money. The faster draw cycle keeps the project moving, the lower retainage keeps working capital free, and the higher rate is offset by the shorter project duration. A spec builder running four to six concurrent fast-turn builds is a hard-money natural customer. The cost of the higher rate is bounded because the loans are out short.
Custom builds with long timelines fit bank lending. The lower rate compounds favorably over a 12 to 14 month build, the longer term aligns with the realistic delivery timeline, and the documentation discipline the bank imposes ends up matching the documentation the custom client expects anyway. A custom builder with a stable balance sheet and a relationship with a community bank typically saves $15,000 to $25,000 in financing cost per build versus hard money.
Hybrid projects, like a builder who pre-funds land acquisition with hard money and refinances into a bank construction loan once entitlements clear, capture some of the speed of hard money on the front end and the rate of the bank on the build itself. The structure works when the bank is comfortable funding into the existing hard-money payoff, which not all banks are.
Refinance to permanent timing
Bank construction loans often roll directly into a permanent mortgage at the same bank, with the rate locked at construction loan close or floating until the conversion. The conversion is a paperwork exercise rather than a new loan application. For an owner-occupied custom build, this is the cleanest path: the construction loan converts at certificate of occupancy and the owner’s permanent mortgage starts.
Hard-money loans typically do not convert. The builder takes out a permanent loan from a separate lender (the owner’s mortgage on a custom build, or a portfolio loan from the bank on a spec rental) and uses the proceeds to pay off the hard-money note. The timing has to be planned. A permanent loan that does not close until 30 days after the hard-money note matures means 30 days of extension interest, which compounds an already expensive financing. Builders who use hard money successfully start the permanent loan application 60 to 90 days before substantial completion so the conversion happens cleanly.
The 926 Stratford financing decision
The 926 Stratford build (1,784 SF, $430,250 contract, Sweetwater TN) is a custom build for an end client with a 7-month construction timeline. The client’s permanent financing is at a regional bank that also offers construction-to-permanent rolls. The build does not need the speed of hard money. It does benefit from the rate, the long term, and the seamless conversion to the permanent mortgage at certificate of occupancy. The bank construction loan at 8% with 10% retainage costs roughly $14,000 in interest over the build, plus $43,025 of retainage that releases at project close.
If the same builder were running an adjacent spec build on a 5-month timeline aimed at the resale market, hard money would be the right choice. The cost spread of $16,500 is offset by the working capital freed from the missing retainage, the faster draw cycle on a fast-moving site, and the speed of close at origination. The same builder uses different lenders for different projects, which is the entire point.
How BuilderGrid handles draw management across lender types
BuilderGrid configures the draw workflow against the lender’s actual requirements rather than a generic template. Bank-style draws generate the full G702 and G703, attach lien waivers and COIs at the line level, and route to the third-party inspector with the documentation pre-assembled. Hard-money draws compress to the photo bundle, the brief narrative, and the cost-to-complete update, with the same line-item discipline underneath. Retainage rates, draw cycle, and prepay terms live at the loan level so the builder running multiple projects across multiple lenders sees each draw assembled correctly for its specific lender, with the documentation a given lender expects and none of the documentation it does not.