Construction Loans

A construction loan is financing used to build a home, with funds released in stages as work progresses rather than all at once. Depending on the loan structure, it may cover construction only or combine construction financing with a mortgage for the completed home.

Who construction loans may be for

Construction loans may suit buyers planning to build a primary residence, a second home, or—in some cases—another type of residential property. They can also be relevant to people who own land and want to finance a build, or who are purchasing land as part of a construction plan. Available loan options and property uses depend on lender requirements.

Qualifying generally involves more than reviewing a borrower’s income and credit. The lender may also assess the building plans, project budget, land, construction schedule, and builder. Borrowers commonly need to document their finances and show that the project is feasible. Approval and eligibility are subject to credit approval and applicable program and lender guidelines.

Construction financing is not one uniform national program. Loan terms and requirements can differ among lenders and loan types. A loan officer can discuss which options may fit your plans and explain any applicable requirements.

How the process typically works

1. Discuss the project and financing. We can review your goals, whether you own or need to purchase land, and whether you are considering construction-only financing or a construction-to-permanent loan. We can also explain the documents needed to evaluate your application.
2. Prepare the plans and budget. You may need to provide building plans, a detailed cost breakdown, a proposed timeline, and information about the builder. The lender may review the builder’s qualifications and the project’s expected value when complete.
3. Apply and complete underwriting. The lender evaluates your credit, income, assets, debts, and other application information, along with the project details. An appraisal may consider the home as proposed to be built, using the plans and specifications provided.
4. Close and begin construction. If approved and the loan closes, the lender establishes how funds will be made available. Construction money is often released in stages, called draws, as work reaches agreed milestones. Inspections or other documentation may be required before a draw is approved.
5. Complete the build and address the permanent financing. With a construction-to-permanent loan, the financing may convert to a long-term mortgage after the home is completed and applicable conditions are met. A construction-only loan typically requires a separate mortgage or another payoff plan. The specific steps and timing depend on the loan documents and lender requirements.

Loan structures and draw schedules

A construction-to-permanent loan combines financing for the build with long-term home financing. Depending on the product, closing may occur once or may involve more than one closing. Ask whether the permanent loan terms are established before construction, what conditions apply to conversion, and whether any choices or documentation will be needed when the home is finished.

A construction-only loan finances the building period, but the borrower generally needs to arrange separate long-term financing or another way to repay it. That can mean another application and closing, and future mortgage terms may depend on the borrower’s circumstances and market conditions at that time.

Draw schedules set out when portions of the loan may be disbursed. The schedule may be tied to construction stages, with inspections, invoices, lien waivers, or other records required. Delays, cost changes, and incomplete work can affect the timing of draws, so it is important to understand how the lender handles changes and what happens if the project runs over schedule.

Costs, down payment, and other requirements

Construction loans can involve costs beyond those of a typical home purchase mortgage. The exact charges depend on the lender, loan structure, property, and project. Ask for an estimate of costs and when each may be due.

• Loan and closing costs: These may include origination, appraisal, title, recording, and other closing charges.
• Construction-related costs: Inspections, plan reviews, permits, and other project services may add expenses. Some may be paid directly by you or included in the project budget, depending on the arrangement.
• Interest during construction: Payments during the build vary by loan. Some arrangements charge interest on the amount already disbursed, and some may use interest-only payments during construction. The note and disclosures explain how interest is calculated and billed.
• Down payment and reserves: Required funds vary by lender and product. You may need funds for a down payment, closing costs, land, or reserves for unexpected expenses. The lender can explain what funds must be documented and whether existing land equity may be considered.
• Mortgage insurance and loan limits: Whether mortgage insurance applies depends on the loan type, down payment or equity, and applicable guidelines. Loan limits, where relevant, depend on the program and may vary by location and property characteristics. Ask us which limits and insurance rules apply to the option you are considering.

Construction budgets may include a contingency for eligible unforeseen costs. Whether a contingency is required, how it is calculated, and how unused funds are handled depend on the lender and loan terms. Changes to plans or costs may require lender review before work proceeds.

Potential benefits and trade-offs

Construction financing can provide a way to fund a home build through staged disbursements, rather than financing the entire project as if the finished home already existed. A construction-to-permanent option may bring the construction and long-term financing into one overall arrangement, depending on the product. These features may help organize the financing process, but they do not remove the responsibilities or uncertainties involved in building.

Building can take time, and costs or schedules may change. You may need to coordinate closely with a builder, provide documents throughout construction, and keep enough funds available for expenses not covered by the loan. A construction-only loan also means arranging repayment or permanent financing separately. Review the loan terms and project budget carefully so you understand both the financing and the construction risks.

Common misconceptions

• “A construction loan is the same as a regular mortgage.” Construction financing often has staged draws and project-related reviews. The application, payment structure, and documentation may differ from financing a completed home.
• “The lender pays the builder the full amount upfront.” Funds are commonly disbursed in draws as work progresses and required conditions are met. The exact process is set by the loan documents.
• “Every construction loan converts automatically.” Conversion is available only with certain structures and may depend on completion, documentation, and other conditions. Construction-only loans generally require a separate payoff plan.
• “The approved budget covers every change.” Changes may need approval and could require additional funds. Ask how the lender handles change orders, overruns, delays, and unused contingency funds.
• “Owning land means no other funds are needed.” Land equity may be considered in some cases, but borrowers may still need funds for a down payment, closing costs, reserves, or project expenses.

How to get started with us

Start by gathering what you know about the project: whether you have land, your preferred home plans, an estimated budget and schedule, and information about a potential builder. We can discuss construction-only and construction-to-permanent structures that may be available, explain what documentation is needed, and outline the costs and steps to evaluate your application.

Before choosing a loan, ask how draws are approved, how payments work during construction, what happens if the project is delayed or costs change, and what conditions apply to permanent financing. We can help you understand the process and identify questions to resolve with your builder. Any financing remains subject to credit approval and applicable program and lender guidelines.