For a comparison of all major mortgage types — conventional, FHA, VA, USDA, ARM, and jumbo — see the Mortgage Loan Types hub.
Everything you need to know about financing a new home build with a construction loan.
What Is a Construction Loan?
A construction loan is short-term financing specifically designed to cover the costs of building a new home or doing major renovations. Unlike a regular mortgage where you receive a lump sum, construction loans disburse funds in stages as building progresses.
Key Features
| Feature | Details |
|---|---|
| Term | 6-18 months typically |
| Disbursement | In “draws” as work completes |
| Interest | Pay only on amount drawn |
| Rates | 1-2% higher than mortgages |
| After construction | Convert to mortgage or pay off |
Types of Construction Loans
| Type | How It Works | Best For |
|---|---|---|
| Construction-to-permanent | Converts to mortgage automatically | Most borrowers |
| Construction-only | Separate construction and mortgage | Those wanting to shop rates later |
| Renovation loan | Includes purchase + renovation | Fixer-uppers |
| Owner-builder | Borrower acts as contractor | Licensed builders only |
Construction-to-Permanent (One-Time Close)
| Advantage | Disadvantage |
|---|---|
| One closing, lower fees | Rate locked early |
| Simpler process | Less flexibility |
| No requalification needed | Must choose lender upfront |
Construction-Only (Two-Time Close)
| Advantage | Disadvantage |
|---|---|
| Shop mortgage rates later | Two closings, more fees |
| More lender options | Must requalify for mortgage |
| Flexibility | More paperwork |
Construction Loan Rates
As of March 2026
| Credit Score | Rate Range |
|---|---|
| 760+ | 8.00-8.75% |
| 720-759 | 8.50-9.25% |
| 680-719 | 9.00-9.75% |
| 660-679 | 9.50-10.25% |
Rates vary by lender, loan type, and project details
Rate Comparison
| Loan Type | Typical Rate |
|---|---|
| Construction loan | 8.00-10.00% |
| 30-year mortgage | 6.50-7.50% |
| Difference | 1-2% higher |
How the Draw Process Works
Construction loans are disbursed in draws (typically 4-6) as work progresses:
| Draw | Stage | Typical % |
|---|---|---|
| 1 | Foundation/site work | 10-15% |
| 2 | Framing | 15-20% |
| 3 | Rough-in (plumbing, electrical) | 15-20% |
| 4 | Interior finish | 20-25% |
| 5 | Final completion | 20-25% |
Draw Process Example
$400,000 construction loan:
| Month | Work Completed | Draw Amount | Total Drawn | Interest Payment* |
|---|---|---|---|---|
| 1 | Foundation | $60,000 | $60,000 | $450 |
| 3 | Framing | $80,000 | $140,000 | $1,050 |
| 5 | Rough-in | $80,000 | $220,000 | $1,650 |
| 7 | Interior | $100,000 | $320,000 | $2,400 |
| 9 | Final | $80,000 | $400,000 | $3,000 |
*At 9% annual rate, interest-only on balance
Construction Loan Requirements
Borrower Requirements
| Requirement | Typical Standard |
|---|---|
| Credit score | 680+ (some allow 620+) |
| Down payment | 20-25% of total cost |
| DTI ratio | Under 45% |
| Cash reserves | 6+ months payments |
| Income verification | Stable employment |
Project Requirements
| Requirement | Details |
|---|---|
| Licensed builder | Required (self-build rare) |
| Detailed plans | Blueprints and specs |
| Cost breakdown | Line-item budget |
| Building permits | All required permits |
| Appraisal | Based on completed value |
| Timeline | Realistic schedule |
Costs to Expect
| Cost | Amount |
|---|---|
| Origination fee | 1-1.5% of loan |
| Appraisal | $400-$800 |
| Inspection fees | Multiple, $100-$500 each |
| Title insurance | $1,000-$3,000 |
| Closing costs | 2-5% of loan |
| Contingency reserve | 10-15% of budget |
Budget Example: $400,000 Build
| Item | Cost |
|---|---|
| Land (if not owned) | $100,000 |
| Construction budget | $400,000 |
| Contingency (10%) | $40,000 |
| Closing costs | $15,000 |
| Interest during construction | $10,000-$15,000 |
| Total needed | $555,000-$570,000 |
Construction Loan vs Building Cash
| Factor | Construction Loan | Cash |
|---|---|---|
| Interest cost | $10,000-$30,000+ | $0 |
| Leverage | Build now, pay over time | Must save first |
| Risk | Lender shares risk | All your risk |
| Flexibility | Lender approval needed | Full control |
| Best for | Most people | Cash-rich buyers |
Finding a Construction Lender
| Lender Type | Pros | Cons |
|---|---|---|
| Local/regional banks | Know local market | May have limited products |
| Credit unions | Often lowest rates | May have restrictions |
| National lenders | Variety of products | Less local knowledge |
| Mortgage brokers | Shop multiple options | Extra layer |
Questions to Ask
- Construction-to-perm or construction-only?
- What’s the rate lock period?
- How many draws are allowed?
- What are inspection requirements?
- What happens if construction delays?
- Can I change the permanent loan terms?
Timeline: What to Expect
| Phase | Timeline |
|---|---|
| Find lender, get preapproved | 2-4 weeks |
| Submit plans and budget | 2-4 weeks |
| Appraisal and approval | 3-6 weeks |
| Closing on land/loan | 2-4 weeks |
| Construction | 6-18 months |
| Final inspection | 1-2 weeks |
| Convert to permanent mortgage | 2-4 weeks |
Total: 10-24 months from start to finished home
Common Pitfalls
| Pitfall | How to Avoid |
|---|---|
| Cost overruns | Build in 10-15% contingency |
| Construction delays | Pad timeline estimates |
| Contractor issues | Thoroughly vet builder |
| Interest rate changes | Lock rate if possible |
| Scope creep | Stick to approved plans |
| Draw delays | Understand lender’s process |
When Construction Loan Makes Sense
| Good For | Not Ideal For |
|---|---|
| Building on owned land | Speculative builds |
| Custom home needs | If you can’t make 20% down |
| Rural areas (limited inventory) | If timeline is uncertain |
| When building saves money | First-time home builders (research first) |
Related: Mortgage Rates | How Much House Can I Afford? | Down Payment Calculator
The content on Wealthvieu is for informational purposes only and should not be considered financial, tax, or investment advice. Consult a qualified professional before making financial decisions. Full disclaimer · Editorial policy