New Construction Loans — One-Time-Close Financing
New construction loans finance the ground-up build of a home — covering land acquisition (if needed), materials, labor, permits, and builder draws throughout construction. Unlike a standard mortgage that funds at one closing, construction loans release funds in stages as your builder hits agreed-on milestones. When the home is complete, the loan either converts to a permanent mortgage (a one-time-close loan) or is paid off via a separate refinance (two-time close). The right structure depends on your rate-risk tolerance, the complexity of the build, and whether you want a single closing or two.
How Construction Loans Work
Construction financing is typically structured in phases. Funds are disbursed in draws as the project hits milestones — foundation, framing, mechanical systems, and final completion. Once the build is finished, the loan either converts to a permanent mortgage or is refinanced into one.
One-Time Close vs. Two-Time Close
A one-time close combines the construction loan and the permanent mortgage into a single transaction, locking in terms upfront. A two-time close involves separate closings — one for the build phase and one for the permanent loan — which offers more flexibility but involves two sets of closing costs.
What You Will Need
Lenders generally require approved building plans, a licensed and insured builder, a detailed construction budget, and a timeline for completion. An appraisal is typically based on the projected value of the finished home rather than the current lot value.
Who Benefits
Buyers who want a custom-built home, investors developing new properties, or homeowners rebuilding on existing land can all benefit from construction financing. It allows you to finance the entire building process rather than paying out of pocket during construction.
Who New Construction Loans Are For
Buyer commissioning a custom home
You have a lot (purchased or inherited) and a builder, and you need financing to cover the build. A construction-to-permanent loan locks your rate for the long-term mortgage and funds the build in draws. Most common use case.
Buyer in a new-construction subdivision with a production builder
Many national builders (Lennar, DR Horton, Toll Brothers) handle the construction loan themselves and the buyer takes out a standard purchase mortgage at completion. If your builder doesn’t offer financing, a construction-to-permanent loan is the equivalent structure.
Homeowner rebuilding on existing land
Tear-down and rebuild scenarios often qualify for construction financing. The lot value plus demolition cost plus build cost determines the total project budget and loan amount.
Investor building a spec home
Spec builders (build-to-sell) typically use short-term construction financing, then sell the home at completion rather than refinancing into a permanent mortgage. Requires a construction-only program and stronger down payment.
Example Construction Scenario
$600,000 custom build on an owned lot
You own a $120,000 lot free and clear. Projected finished home value is $720,000, and the build budget is $480,000. A construction-to-permanent loan at 80% of the as-completed value funds $576,000: the $120,000 lot equity contributes to the down payment, and the remaining $480,000 funds the build across 6–8 monthly draws as the builder completes framing, mechanicals, drywall, interior finish, and final inspection.
During the 12-month build period, you pay interest only on drawn funds. If the average outstanding balance is $240,000 at a 7.5% construction rate, monthly interest runs about $1,500 — growing from near-zero at groundbreaking to the full $576,000 balance at completion. At final inspection and certificate of occupancy, the loan automatically converts to a 30-year permanent mortgage at the rate you locked upfront.
Eligibility Details
- Credit score
- 680+ typical; 720+ for best pricing
- Down payment
- 10–20% primary residence; 20–25% second home; 25–30% investment/spec
- DTI
- Typically ≤43%
- Reserves
- 6–12 months of PITI required post-closing
- Builder requirements
- Licensed, insured, references reviewed; some programs require pre-approval of the specific builder
- Plans
- Approved architectural plans, specifications, and a detailed line-item budget
- Timeline
- 12-month construction period standard; extensions available for fee
- Appraisal
- Projected “as-completed” value based on plans and comparable finished homes
- Contingency reserve
- 5–10% of budget recommended for change orders and overruns
Run the Numbers
Before you finalize plans, model the projected permanent payment with the mortgage calculator so you know what your PITI will look like once the loan converts. If you’re deciding between building and buying existing, the rent vs. buy calculator helps frame the long-term math. Still exploring financing? Talk with your loan officer about related options on the construction hub and land loans page.
Frequently Asked Questions
What's the difference between a construction loan and a construction-to-permanent loan?
A standalone construction loan covers the build period only — typically 12 months — and is paid off when you refinance into a permanent mortgage at completion. A construction-to-permanent (one-time-close) loan combines both into a single closing: you lock the permanent rate upfront, fund the build in draws, and the loan automatically converts to your permanent mortgage when the home is finished.
How much do I need to put down on a new construction loan?
Typical down payments are 10–20% on construction-to-permanent loans for primary residences, 20–25% for second homes, and 25–30% for investment or spec builds. The lot’s appraised value (if you already own it) can count toward your down payment equity.
How does the draw schedule work?
Funds are released in stages as the build hits construction milestones: lot/foundation, framing, rough-in (mechanical, electrical, plumbing), drywall and interior finish, and final completion. Each draw typically requires an inspection to verify work is complete before funds are released to the builder.
Do I make payments during construction?
Yes. During the construction phase you pay interest only on funds that have been drawn to date, not on the full loan amount. Interest-only payments grow as draws are funded. Some programs allow you to finance construction-period interest into the loan balance if cash flow is tight.
Do I need approved plans and a licensed builder?
Yes. Most construction lenders require complete architectural plans, a detailed construction budget from a licensed and insured builder, the builder’s references and credit review, and a fixed build timeline. Owner-builder programs exist but are rare and have tighter qualifying requirements.
How is the home appraised before it's built?
The appraiser uses your plans, specifications, and comparable recent sales of finished homes in your area to project the “as-completed” value. That projected value is what supports the loan amount, not the current vacant lot value.
What if construction costs go over budget?
Change orders and cost overruns are your responsibility, not the lender’s. Most construction loans build in a small contingency (5–10% of budget), but material overruns require you to bring cash or reduce scope. This is why locking your builder’s pricing upfront and keeping a contingency reserve is essential.
Can I build on land I already own?
Yes. If you already own the lot free and clear, its appraised value typically counts toward your equity contribution. If you have a lot loan, it’s paid off at the construction loan closing and the balance is rolled into the new loan.
What's the typical construction timeline?
Custom home builds typically run 6–12 months from groundbreaking to completion. Construction loans are usually written with 12-month terms; extensions are available for fee if delays push past that. Complex or larger custom homes can run 18 months.
How do construction loan rates compare to standard mortgages?
Construction loan rates typically run 0.25–0.75% higher than comparable 30-year fixed-rate mortgages during the build phase. With a one-time-close loan, the rate you lock applies to both the construction and permanent phases, so you’re protected if rates rise during the build.
Construction loan availability, terms, and requirements vary based on the lender, property type, and borrower profile. Contact the mortgage team to discuss your building project.