How It Works
A construction loan is short-term financing used to pay for the cost of building a new home from the ground up. Unlike a traditional mortgage where funds are released in a single lump sum at closing, a construction loan disburses money in stages (called "draws") as specific construction milestones are completed — foundation poured, framing finished, drywall installed, certificate of occupancy issued. The lender or its inspector verifies each milestone before releasing the next draw.
Most modern construction financing uses a "one-time close" or "construction-to-permanent" structure. You close once, get a single set of closing costs, and the loan automatically converts from a construction loan (during the build) to a permanent mortgage (when the home is finished). During construction you typically pay interest-only on the drawn balance, then begin full principal-and-interest payments after conversion. This is much cleaner than the older "two-close" model where you refinanced at the end of construction.
Construction loans require detailed plans, a fixed-price builder contract, an appraisal based on completed value, and a credit-qualified borrower. Down payments are typically 20–25% of the total project cost (land + construction), though FHA and VA construction loans allow lower down payments for qualifying borrowers. Closing usually takes 45–60 days, and construction typically runs 6–12 months for a custom single-family home.
Who Is This For?
- Buyers building a custom home on a lot they own or are buying
- Borrowers building on raw land or in a new-construction subdivision
- Homeowners doing a major tear-down/rebuild project
- Buyers wanting to lock in long-term financing before construction starts
- Borrowers using FHA or VA construction options
Pros & Cons
Frequently Asked Questions
What is a one-time close construction loan?+
A one-time close (also called construction-to-permanent) closes once and automatically converts from a construction loan during the build to a permanent mortgage when the home is complete. You pay one set of closing costs instead of two.
How much down payment do I need?+
Conventional construction loans typically require 20–25% down on the total project cost (land plus construction). FHA construction loans (FHA 203(k) New Construction) allow as little as 3.5% down for qualifying borrowers. VA construction options can go to 0% down.
Do I pay full mortgage payments during construction?+
No. During the construction phase you typically pay interest-only on the drawn balance. Once the home is complete and the loan converts to permanent financing, you begin full principal-and-interest payments.
What if construction takes longer than expected?+
Most construction loans allow for 6–12 months of construction. Extensions are usually available for delays (typically 30–60 days with a fee). Plan for delays — supply chain issues and inspections can easily add a month or two to ambitious timelines.