Loan Programs

Construction Loans

Construction loans have stages that standard mortgages do not: funds are distributed at defined milestones rather than in a lump sum at closing, a licensed builder is part of the transaction from day one, and the loan is underwritten against your plans and specs rather than a finished property. The two main structures — construction-to-permanent and construction-only — each have advantages, and understanding the difference between them is one of the first things worth being clear on. This page covers how both work, how draws and inspections operate during the build, and what you need to have in place before you start.

Overview

What a Construction Loan Is — and Who It Serves

A construction loan finances the cost of building a home, not purchasing one. Instead of a single disbursement at closing, funds are released in stages throughout the build as work is completed and verified. During construction, most borrowers pay interest only on the amount that has been drawn — not the full loan balance.

Construction financing makes sense when you want to build on land you already own or plan to purchase as part of the transaction, when no existing property matches what you need, or when you are working with a builder on a custom or semi-custom home. It is most commonly used for primary residences, though some programs extend to second homes.

The borrowers who tend to be best positioned for construction loans are financially stable, have strong credit, can document income reliably, and understand that the process involves more moving parts than a standard purchase. If you are purchasing a spec home from a builder who already owns and is finishing the property, a standard purchase mortgage is the right tool — a construction loan is for when the home does not exist yet and you are financing the build itself.

There are two main structures. Understanding how they differ is the foundation for figuring out which one fits your project.

The Two Structures

Construction-to-Permanent vs. Construction-Only

Both structures finance the build. The difference is what happens at the end of construction and how many times you close.

Feature Construction-to-Permanent (One-Time Close) Construction-Only (Two-Close)
Closings One closing covers both the construction phase and the permanent mortgage Two separate closings — one for construction, one for the permanent loan at completion
Closing costs One set of closing costs Two sets of closing costs — one at each closing
Qualification Qualify once; the loan converts automatically at completion Qualify twice — once for the construction loan, once for the permanent mortgage
Rate on permanent loan Typically set at or near the original closing — confirm when your rate locks with your specific program Permanent rate is set at the second closing — after construction is complete; market risk cuts both ways
Lender flexibility Permanent lender is set at original closing Freedom to shop permanent lenders after construction; you may find better terms
Re-qualification risk No re-qualification required at conversion Must re-qualify for the permanent loan; a job change or credit event during construction matters
Best suited for Borrowers who want predictability and want the permanent financing locked in before construction begins Borrowers who expect home value to rise during construction, or who want flexibility in permanent lender selection

Rate Lock Detail — One-Time Close

In a construction-to-permanent loan, the borrower qualifies once — but the rate on the permanent loan is typically set at or near the time of the original closing, not at application. Some programs lock the rate at closing; others float during construction and lock at or before conversion. This is one of the most commonly misunderstood aspects of the one-time close structure. Before you commit to a program, ask specifically when the permanent rate locks and whether there is a float-down option if rates improve during the build.

Next Step

Construction financing has more moving parts than a standard purchase.

A Home Financing Snap Shot is where we figure out which structure fits your project — construction-to-permanent or construction-only — and what you need to have in place before you start.

Get a Home Financing Snap Shot

How It Works

Key Mechanics to Know

  1. 1

    The Draw Process

    Construction loan funds are not disbursed at closing — they are released in stages as construction milestones are completed. Before each draw is funded, a lender-ordered inspection verifies that the work claimed has actually been done. Lenders typically structure 4 to 6 draws tied to milestones like foundation, framing, rough mechanicals, and final completion. The borrower and builder submit a draw request, an inspector confirms progress on-site, and then funds are released. Expect 3 to 7 business days between submission and disbursement under normal conditions. Delays in documentation or inspection scheduling are the most common source of project slowdowns — not the lender itself.

  2. 2

    Interest During Construction

    During the construction phase, you pay interest only on the amount that has been drawn — not the full loan balance. If your construction loan is $500,000 and you have drawn $150,000 so far, your interest accrues on $150,000. That payment grows as more draws are taken. Once construction is complete and the loan converts to permanent financing (or you close on the new permanent loan), you begin regular principal and interest payments on the full balance.

    Key Detail Often Missed

    Some programs establish an interest reserve at closing — an amount set aside within the loan to cover interest payments during construction, so the borrower is not making out-of-pocket payments while the house is being built. Not all programs include this. If cash flow during construction is a planning concern, confirm at the outset whether an interest reserve is built into your structure.

  3. 3

    The Appraisal

    There is no house to inspect when you apply — so the appraisal is done based on the plans, specifications, and construction contract. The appraiser estimates the as-completed value of the home using comparable sales for finished properties of similar size, quality, and location. The loan amount is based on this projected value. If plans change materially during construction, the lender may need to re-evaluate.

  4. 4

    Builder Approval

    Your general contractor must be licensed, insured, and approved by the lender before the loan can close. The lender reviews the builder’s credentials, track record, financial standing, and the signed construction contract. Most lenders require a fully executed contract with scope, budget, and timeline before closing. Having that contract in place at application rather than during underwriting keeps the process moving on a predictable timeline.

    Spec builders — contractors building for their own account — and owner-builders face different and more stringent requirements. Owner-builder programs exist at some lenders, but availability varies significantly by lender and state. If you are planning to act as your own general contractor, confirm what programs are available before assuming this path is open.

  5. 5

    Contingency Reserve

    Most construction lenders require a contingency reserve — typically around 10% of the construction budget — to cover cost overruns, change orders, or unexpected site conditions. This reserve is often built into the loan amount and is only accessible if needed. If construction comes in under budget, unused contingency funds are generally applied to reduce the loan balance at conversion. The reserve is not extra spending money; it is a structural safeguard the lender requires as a condition of the loan.

  6. 6

    Construction Term and Extensions

    Construction loans typically have a 12-month term — meaning the build is expected to be complete and the loan converted or paid off within that window. Extensions are available from many lenders, but they require approval, additional documentation, and typically an extension fee. Construction delays are common across project types and sizes. When you are planning your timeline, build in a buffer beyond the contractor’s initial estimate and confirm your lender’s extension policy and costs upfront.

Qualification

What Lenders Underwrite

Construction loan underwriting covers the same elements as a standard mortgage — credit, income, assets, and property value — with a few additions specific to the build.

Borrower Qualification

  • ✓Credit score minimums vary by program — conventional construction programs typically require stronger profiles than government-backed options; confirm current thresholds with Jon for the programs he is placing
  • ✓Income documentation follows the same standards as a standard mortgage: W-2s, tax returns, pay stubs, or self-employment documentation
  • ✓Debt-to-income ratios are evaluated at qualification; because the loan converts to a permanent mortgage, lenders underwrite both phases together in a one-time close
  • ✓Reserves — funds remaining after closing — are typically required; the exact amount varies by program and loan size

Down Payment

  • ✓Most construction loan programs require 20% or more; some government-backed and conventional programs allow lower down payments for qualified borrowers
  • ✓FHA one-time close programs allow as little as 3.5% down for eligible borrowers with qualifying credit profiles
  • ✓VA one-time close programs are available with no down payment for eligible veterans and active-duty service members
  • ✓If you already own the lot, its equity can often count toward the down payment requirement — confirm this with your specific program

Builder Requirements

  • ✓Licensed and insured general contractor, approved by the lender
  • ✓Demonstrated track record — lenders review the builder’s history and financial stability
  • ✓Signed construction contract with detailed scope, budget, and timeline — required before the loan can close
  • ✓Complete plans and specifications for the appraisal

Property Requirements

  • ✓Lot must be owned by the borrower or purchased as part of the transaction
  • ✓Plans and specs must be complete enough for an as-completed appraisal
  • ✓Permits should be in process or ready to pull — some lenders will not close until permits are issued
  • ✓Primary residences are eligible across most programs; second home eligibility varies by program

Home Financing Snap Shot

A Home Financing Snap Shot gives us a clear picture of which structure fits your project.

I will come back with a read on which program makes sense, what your down payment looks like, and what needs to be in place before you move forward.

Get a Home Financing Snap Shot

Common Situations

Who This Fits — and When to Think It Through

Good Fit

You own land and have a builder selected

If you already hold the lot and have a licensed builder ready with plans and a signed contract, the loan process has a clear path forward. The lot equity can often apply toward your down payment, the builder’s documentation satisfies the lender’s approval requirement, and the appraisal can proceed on the completed plans. A construction-to-permanent loan is often the most efficient structure here — one closing, one set of costs, and the permanent financing is in place before the build begins.

Good Fit

You expect the home to appraise significantly higher at completion

If you are building in a market where land and construction costs are below the finished value of the home — custom homes in desirable areas often fit this pattern — the two-close structure has a specific advantage: you qualify for the permanent mortgage after construction is complete, based on the finished appraised value. That higher value can improve your loan-to-value ratio and potentially your permanent loan terms. The tradeoff is two closings, two sets of costs, and the need to re-qualify. If your financial picture is stable and the appreciation case is clear, this can be worth it.

Consider the Full Picture

Your income or employment situation may change during the build

In a two-close structure, you re-qualify for the permanent loan after construction is complete — typically 9 to 12 months after the construction loan closes. If your income, employment, or debt load changes during that window, the re-qualification is underwritten on your situation as it stands at that point, not as it was when you originally closed. A one-time close construction loan works differently: you qualify once, and the conversion to permanent financing does not require re-underwriting your income or credit. If there is meaningful uncertainty in your employment or income over the next 12 to 18 months, the one-time close structure removes that variable from the equation — at the tradeoff of less flexibility in permanent lender selection.

Consider the Full Picture

You want to act as your own general contractor

Owner-builder financing — where the borrower serves as the general contractor — is available from some lenders, but not most. The programs that do allow it require the borrower to demonstrate construction experience, carry appropriate insurance, and in some cases hold a contractor’s license or document substantial prior project history. Underwriting is more conservative, down payment requirements are typically higher, and the loan structure is less widely available. If owner-builder financing is part of your plan, confirming which programs are available for your specific situation is the first conversation to have — availability varies significantly by lender and state.

How Jon Works

An Independent Broker on Your Side of the Table

I am an independent mortgage broker, which means I work for you, not for a lender. I have access to a broad range of construction loan programs across multiple lenders — conventional, FHA, and VA one-time close programs, as well as construction-only structures for borrowers where the two-close approach is the right fit. My job is to match your project to the program that serves you best, not to steer you toward a product I happen to carry.

Construction loans require more upfront conversation than a standard purchase mortgage. I want to understand your project, your builder situation, your timeline, and your risk tolerance before we talk about which structure makes sense. The Home Financing Snap Shot is where that starts.

Once we identify the right program, I manage the process on your behalf — from builder approval to draw coordination to the permanent conversion. I stay in communication throughout the build because things change in construction, and getting ahead of issues early is far better than scrambling when a draw is pending or a timeline is slipping.

A note on construction loan interest and taxes: the interest that accrues during the construction phase may have specific tax treatment depending on your situation. I am not a CPA and I do not give tax advice. If construction loan interest is a planning consideration for you, your accountant is the right person to consult before you close.

Get Started

Start with a Home Financing Snap Shot

Tell me about your project — land, builder status, timeline, and where you are in the planning process. I will come back with a clear picture of which structure fits and what you need to move forward.

Get a Home Financing Snap Shot

FAQ

Frequently Asked Questions

A construction loan finances the build itself — the home does not exist yet and funds are released in stages as work is completed. A new construction purchase mortgage is used when a builder has already built or nearly completed the home and you are buying it as a finished product. If you are selecting a floor plan from a production builder and they are building the home on their own account, you likely need a purchase mortgage, not a construction loan. The construction loan is for when you are financing the build and taking on the risk and management of the construction process.
Often yes, but with conditions. Most construction lenders will count the equity in your lot toward the down payment requirement — the equity is the current appraised value of the land minus any outstanding balance on a land loan, if you financed the purchase. The land must be owned outright or nearly so for the equity to count meaningfully. Confirm with your specific program whether lot equity satisfies the full down payment requirement or only a portion of it, and whether there are seasoning requirements on how long you must have owned the land.
Builder approval is a requirement before the loan can close, not necessarily before you apply. However, the lender’s review of your builder — credentials, license, insurance, financial standing, and construction contract — is part of the underwriting process. The earlier you begin that documentation, the faster the process moves. One common source of delay is incomplete builder documentation submitted late in underwriting. Most construction lenders require a fully signed construction contract with scope, budget, and timeline before closing. Having that contract in place when you apply, rather than during underwriting, is one of the most practical ways to keep the timeline moving.
The contingency reserve — typically around 10% of the construction budget — is the first line of defense. If a cost overrun stays within the contingency, you draw from that reserve per your lender’s process. If costs exceed the total loan amount including contingency, the additional funds must come from you out of pocket; the lender will not increase the loan after closing without a formal modification process, which is not always available. This is why the construction budget and the contingency estimate both deserve careful attention at the outset — the loan is structured around those numbers at closing.
This varies by program, and it is one of the most important questions to ask before committing to a structure. In most one-time close programs, the permanent rate is set at or near the original closing — before construction begins. Some programs offer a float-down provision that allows the rate to drop if market rates improve during the build; others do not. A few programs set the permanent rate at conversion rather than at closing. You are not locking at application; you are locking when you close the construction loan. Given that construction can take 9 to 12 months, understanding exactly when your rate is set and what options you have if rates move during the build is worth confirming in writing before you sign.
Most construction loans have a 12-month term. Extensions are available from many lenders but require approval, additional documentation, and typically an extension fee. The lender will want to understand why construction is behind schedule and confirm that the project remains viable. Extensions are not guaranteed. If your project has a higher-than-average complexity — custom millwork, challenging site conditions, remote location, or a builder managing multiple projects — plan for the possibility that the build takes 14 to 16 months, and ask your lender upfront what extension options exist and what they cost.
Most residential construction loans structure 4 to 6 draws tied to defined milestones — common checkpoints include foundation complete, framing complete, rough mechanicals (plumbing, electrical, HVAC), drywall and finishes, and project completion. The lender orders and pays for the inspection, using an independent third party to verify that the work claimed in the draw request has been completed to standard before funds are released. The borrower and builder submit the draw request; the inspector verifies the milestone; the lender releases the funds. Processing typically takes 3 to 7 business days after the inspection is completed.
Most government-backed one-time close construction programs — FHA, VA — are restricted to primary residences. Conventional construction programs may allow second homes, with higher down payment requirements and more conservative underwriting. Investment property construction financing exists but is a narrower market with portfolio lenders and commercial-style terms rather than standard residential programs. If you are building a second home or investment property, the eligible program set is smaller — confirming occupancy eligibility early keeps your project timeline accurate.
Owning the lot free and clear is an advantage in several ways. The full appraised value of the land counts as equity in the transaction, which can satisfy some or all of the down payment requirement depending on the program. It also simplifies the transaction — there is no land acquisition component to finance, and title is already established. In a one-time close structure, the existing lot is brought into the transaction as the borrower’s contribution at closing. One thing to confirm: whether the lot was purchased more than six months ago matters for certain programs. Fannie Mae, for example, has specific rules around cash-out treatment that depend on how long the borrower has held the lot. Confirm the timing with your loan officer before assuming the equity treatment applies.
A lien waiver is a document signed by a contractor, subcontractor, or supplier stating that they have been paid for their work and waive any right to place a mechanic’s lien on the property for that portion of the work. Lenders typically require lien waivers as part of each draw package — they confirm that the funds from prior draws were actually paid to the people who did the work, not diverted elsewhere. If subcontractors are not paid and lien waivers are not obtained, those parties can file a mechanic’s lien against the property, which creates a title problem that can complicate or prevent a future sale or refinance. Your general contractor is responsible for collecting these from subcontractors; your lender will require them before releasing each draw.