Construction loans are short-term, higher-interest loans used to cover building costs. Funds are released in stages, called "draws," as construction milestones (e.g., foundation, framing) are completed and verified by an inspection. Once construction is finished, the loan is either paid off or converted into a permanent mortgage.

This popular option combines the construction financing and the long-term mortgage into a single loan with one closing process, saving the borrower time and a second set of closing costs.

During the construction phase, you typically make interest-only payments on the funds that have been disbursed so far. As more draws are taken, your monthly interest payment increases.

You save money if the final cost is less than the approved loan amount. However, you cannot use the excess funds for personal items like furniture; the money is strictly for approved construction costs and is paid directly to the builder.

Yes, they typically have higher qualifying standards due to the increased risk for the lender (there is no completed home as collateral yet). Lenders usually require a higher credit score (680+), a lower debt-to-income (DTI) ratio, and a larger down payment (typically 20%–25%).

Yes, lenders require a signed contract with a licensed, insured, and reputable builder, along with detailed plans, a budget, and a timeline for the project before loan approval.

Most lenders do not allow this due to the higher risk. Some may permit it if the borrower is a licensed builder themselves and can demonstrate significant experience and expertise.

Yes, if you already own the lot, its equity can often be used to cover all or part of the down payment requirement.

The builder submits a request for a draw when a construction phase is complete. The lender orders an inspection to verify the work, then releases the funds. Borrowers are concerned about how quickly this happens, as delays can halt the project. Many builders appreciate a quick turnaround, such as within 24 hours.

Cost overruns are generally the borrower's responsibility, and you may need personal cash reserves to cover them. Significant changes or delays can lead to penalties, loan extensions, or even requiring the borrower to refinance the loan, paying closing costs a second time.

The loan typically covers the cost of the land, labor, materials, permits, and inspections. It usually does not cover the cost of the initial home design/architect fees (which must be self-financed upfront) or non-permanent items like furniture.

Borrowers want specific, realistic timelines, which are typically longer than for a traditional mortgage because they involve vetting the builder and plans. Plan on 60 - 90 days depending on the builders approval process.