Construction loans: Building a home from the ground up

Heads up

We don't offer construction loans at MortgageCS. Construction lending is a specialized field that requires different expertise, inspections, and draw processes than traditional mortgages. But since people ask, here's what you need to know.

What is a construction loan?

A construction loan finances the building of a new home from the ground up. Unlike a regular mortgage where you get a lump sum to buy an existing house, construction loans release funds in stages as the building progresses.

These loans typically have higher interest rates and shorter terms than traditional mortgages. Once construction is complete, you either pay off the loan or convert it to a permanent mortgage.

How construction loans work

The draw process

Instead of getting all the money upfront, funds are released in "draws" at key construction milestones:

1. Land purchase or lot prep
2. Foundation complete
3. Framing complete
4. Mechanical rough-in (electrical, plumbing, HVAC)
5. Drywall and interior finishes
6. Final completion

The lender sends an inspector before each draw to verify the work is done. This protects both you and the bank.

Interest during construction

You typically pay interest-only on the amount that's been drawn. So if you've drawn $100,000 of a $400,000 loan, you're only paying interest on that $100,000. Payments increase as more funds are released.

Types of construction loans

Construction-to-permanent (one-time close)

This combines the construction loan and permanent mortgage into a single loan:

• One closing, one set of fees
• Rate locks in before construction starts
• Automatically converts to a mortgage when building is complete
• Less paperwork overall

Construction-only (two-time close)

Separate loans for construction and permanent financing:

• More flexibility to shop for permanent financing later
• Two closings mean two sets of fees
• Can be useful if rates are expected to drop
• More common with smaller lenders

Owner-builder loans

For people who want to act as their own general contractor:

• Harder to qualify for
• Requires construction experience
• Higher down payments typically required
• Not offered by most lenders

What you'll need to qualify

Construction loans have stricter requirements than regular mortgages:

• Higher credit scores (typically 680+, sometimes 700+)
• Larger down payments (usually 20-25%)
• Detailed plans and specs from your builder
• Licensed, insured contractor with a track record
• Realistic budget with contingency built in
• Construction timeline (most lenders cap at 12 months)

Where to find construction lenders

Look for lenders who:

• Specialize in construction lending (it's their main business)
• Have established relationships with local builders
• Can clearly explain their draw process and inspection requirements
• Offer construction-to-permanent options if that's what you want

Local and regional banks often have stronger construction lending programs than national lenders. They know the local builders and market conditions.

Questions to ask

• How many construction loans do you close per year?
• What's your draw schedule and inspection process?
• What happens if construction goes over budget?
• Can you provide references from recent borrowers?
• What's the process if my builder doesn't meet a deadline?

Alternatives to consider

Buying new construction from a builder

Many production builders (like Toll Brothers, Lennar, etc.) have their own financing arms or preferred lenders. The home is built speculatively or semi-custom, and you get a traditional mortgage at closing.

This is much simpler than a construction loan since you're buying a finished (or nearly finished) product.

Buying land now, building later

If you're not ready to build immediately:

• Purchase land with cash or a land loan
• Save up a larger down payment
• Build when you're ready with better terms

Modular or manufactured homes

Modern modular homes are built in factories and assembled on-site:

• Faster construction timeline
• More predictable costs
• Easier to finance in some cases
• Quality has improved significantly

Questions about your situation?

Even though we don't do construction loans, we're happy to help if you're trying to figure out the best approach for your situation. Sometimes what seems like a construction loan need has a simpler solution.

If you're buying a new construction home from a builder (not building yourself), that's a regular purchase transaction and we can definitely help with that.

Schedule a call and we'll point you in the right direction.