Construction Loans
Short-term financing to fund building a new home.
Overview
Construction loans provide the funds to build a home in stages, releasing money in draws tied to completion milestones rather than as a single lump sum at closing. Many borrowers use a construction-to-permanent structure, which combines the construction loan and the long-term mortgage into a single closing, converting automatically to permanent financing once the home is complete.
Who It’s For & What You’ll Need
- An approved, licensed builder or contractor
- Detailed construction plans, specifications, and a line-item budget
- A down payment, often higher than a typical purchase loan
- An appraisal based on the home’s planned, completed value
- Interest-only payments are common during the construction phase, based on funds drawn to date
Benefits
- A construction-to-permanent structure can mean a single closing instead of separate construction and purchase loans, potentially saving on closing costs
- Interest-only payments during the build reduce cash flow strain while the home isn’t yet livable
- Funds are released in draws tied to construction progress, which protects both borrower and lender
- The permanent loan’s rate and term can often be set at the initial closing, before construction begins
Common Scenarios
- A buyer who owns land and wants to build a custom home rather than buy an existing one.
- A family combining a construction loan with a construction-to-permanent structure to avoid two separate closings.
- A borrower comparing owner-builder options against working with a licensed general contractor.
Frequently Asked Questions
What is a construction-to-permanent loan?
It’s a single loan that funds the construction phase and then automatically converts into a standard long-term mortgage once the home is complete, avoiding a second closing and a second round of closing costs.
How do draw schedules work?
Funds are released in stages as construction reaches agreed-upon milestones — for example, foundation, framing, and finishing — with an inspection typically confirming progress before each draw is released to the builder.
Can I act as my own contractor?
Some lenders allow owner-builders, but many require a licensed, approved general contractor to manage the project; this varies significantly by lender and program.
What happens if construction costs exceed the original budget?
Cost overruns are typically the borrower’s responsibility unless a contingency reserve was built into the original loan; we can discuss how to structure adequate contingency into your budget upfront.
Related Calculators
Run your own numbers before you apply:
Ready to Move Forward with Construction Loans?
Start your application, or talk it through with a loan officer first — whichever fits where you are.