A construction loan is financing used to build a home, with funds released in stages as construction progresses rather than all at once. Depending on the loan structure, it may cover the construction period only or combine construction financing with a mortgage for the completed home. Approval and terms are subject to credit approval and applicable program guidelines.
Construction financing may suit buyers planning to build a primary residence, a second home, or another eligible property. The intended use and property type allowed depend on the specific loan program. It may be worth exploring if you have a suitable building site, a defined project, and a builder who can meet the lender’s requirements.
Qualification usually involves more than reviewing a borrower’s income and credit. Lenders may also assess the project budget, plans and specifications, construction timeline, land, builder, and the value expected after completion. Depending on the program, you may need to provide items such as:
Down payment, credit, debt-to-income, reserve, and property requirements vary by loan program and lender. Meeting preliminary criteria does not ensure approval. Qualification is subject to credit approval and program guidelines.
Construction financing can involve costs beyond the project’s building price. Depending on the loan and transaction, these may include an appraisal, credit and title services, inspections, closing costs, loan fees, builder-related costs, permits, and expenses for utility connections or site preparation. Ask which costs are due upfront, which may be financed if permitted, and which are outside the loan.
During construction, payment arrangements vary. Some loans may require interest payments during the building period, and the way interest is calculated depends on the loan documents and disbursement method. Do not assume payments are based only on funds already drawn or that a particular payment structure applies. Review the note and disclosures for the actual terms.
There is no single construction-loan down payment or universal loan limit. Maximum financing may be determined using program-specific calculations involving project cost, appraised value, land equity, or other factors. Limits and eligible property types can differ across loan programs and lenders. Mortgage insurance may apply in some circumstances, depending on the loan structure, amount financed, and applicable guidelines. A construction loan does not have one standard funding fee that applies to every borrower.
Budget for possible changes, too. Construction costs, schedules, and material availability can shift. A lender may require a contingency reserve or have rules for change orders and cost overruns. The loan documents determine whether additional funds can be borrowed if expenses exceed the approved budget; do not assume they can. Discuss responsibility for overruns with the builder before signing a contract.
A construction-to-permanent loan is designed to finance construction and then provide permanent mortgage financing, subject to the loan’s conversion terms and completion requirements. Depending on the product, the borrower may complete one closing for both phases. The documents should explain how and when conversion occurs, what could change at conversion, and whether any conditions must be met.
A construction-only loan finances the building phase. When construction ends, the borrower generally needs to pay off that loan, often by obtaining a separate mortgage, subject to qualification and prevailing terms at that time. This can mean another application, underwriting review, and closing, with associated costs. Ask how the payoff will work and what happens if completion or permanent financing is delayed.
Construction financing can provide staged access to funds for an approved building project and may bring construction and long-term financing together in one structure. It can also establish a defined process for reviewing the builder, budget, and progress before funds are released.
At the same time, construction loans can involve detailed documentation, draw inspections, deadlines, and additional coordination among the borrower, builder, and lender. The project may need to follow approved plans and budget rules. A delay, cost increase, or change in circumstances could affect the schedule or financing. Compare the full costs and obligations of the available structures rather than focusing only on the initial loan phase.
Start by gathering a preliminary project budget, information about the lot, any builder proposal or contract, and an estimate of when construction may begin. We can discuss your financing goals, explain the construction-loan structures available through us, and outline the information needed for a full review. If your plans or builder are not finalized, we can explain which questions to resolve before moving forward.
Before committing to a loan or construction contract, review the draw schedule, payment obligations, fees, conversion or payoff terms, contingency requirements, and rules for changes or delays. Loan availability, costs, qualification, and terms depend on the borrower, property, project, credit profile, and applicable program guidelines; all financing is subject to credit approval and program guidelines.
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