Construction Loans

Since the house isn’t built yet, a standard appraisal isn’t possible. Instead, a licensed appraiser reviews your plans and the value of your lot to estimate what the home will be worth once it is finished. The lender uses this “subject to completion” value to determine how much they are willing to lend you.

Technically yes, but it is extremely difficult to find a lender for this. Most institutions require you to hire a professional general contractor to ensure the project meets building codes and stays on schedule. Only borrowers with professional construction credentials (like a builder’s license) typically qualify for owner-builder loans in today’s homebuying process.

The approval process for building is more rigorous than a standard purchase. You don’t just need to qualify financially; the project must qualify too. You will need:

A Licensed Builder: A vetted contractor with a proven track record.

The “Blue Book”: A detailed set of architectural plans and an itemized budget.

A Construction Contract: A signed agreement with a fixed price or maximum cost.

Because of the increased risk, lenders have stricter credit standards for construction. While you might get a standard mortgage with a 620 score, most construction lenders look for a score of at least 680 to 720. They also scrutinize your debt-to-income (DTI) ratio more closely to ensure you can handle potential cost overruns.

While you can buy an existing home with as little as 3% down, construction loans usually require a more substantial investment. Most lenders in 2026 require a down payment of 20% to 25% of the total project value (land plus build costs). If you already own the land, the equity in that property can often be used toward your down payment.

Yes. Because there is no finished house to act as collateral, lenders view these loans as higher risk. In 2026, construction loan rates are typically 1% to 2% higher than standard mortgage rates. Additionally, these rates are often variable, meaning they are tied to the prime rate and can fluctuate during the build period.

A construction-only loan (or “two-close” loan) only covers the building phase. Once the home is finished, the borrower must pay the balance in full, usually by taking out a completely separate mortgage. While this allows you to shop for better permanent rates later, it means you’ll have to go through the application and closing process twice, increasing your total fees.

This is often called a “single-close” loan. It combines the construction financing and the permanent mortgage into one transaction. Once the home receives a certificate of occupancy, the loan automatically converts into a standard 15- or 30-year mortgage. This is a popular choice in the modern homebuying process because it saves you from paying two sets of closing costs.

Construction loans work on a “draw schedule.” Rather than receiving all the money at once, the lender releases funds in installments (draws) as the builder hits specific milestones. During the construction phase, you typically make interest-only payments on the amount that has been drawn, rather than the full loan balance. This keeps your monthly costs lower while the house is being built.

In the homebuying process, a construction loan is a short-term, higher-interest loan used to fund the building of a residential property. Unlike a standard mortgage where the lender gives you a lump sum to buy an existing house, a construction loan covers the costs of land, labor, materials, and permits for a home that doesn’t yet exist. These loans are typically active only for the duration of the build (usually 12 to 18 months).