How to Get a Construction Loan: Steps, Costs & Draws

A construction loan pays your builder in stages instead of handing over a lump sum at closing. The lender releases money in draws as the house goes up, sends an inspector out before each one, and charges you interest only on what has been paid out. When construction is complete, the loan either converts into a traditional 15 or 30-year mortgage or gets paid off by one.

If you're building a home to live in, start with the one-time close. The two-closing route mostly makes sense when no one-time program will take your project.

Construction-to-permanent loan (one-time close)

A construction to permanent loan lets you close once and pay closing costs once. The same loan covers construction and then becomes your 30-year mortgage. You can usually lock in your permanent rate at the first closing before construction begins. Once the home is complete, the loan automatically converts to permanent financing without another application or closing.

The catch is the clock. Fannie Mae's single-closing rules cap any one construction period at 12 months and the whole build at 18, with no exceptions. A builder who falls behind the construction schedule can push you into a second closing anyway.

Construction-only loan (two closings)

A construction-only loan, also called a stand-alone construction loan, is a short-term loan that covers just the build, often a year or so. Once the house is done you pay it off with a separate permanent mortgage, which means a second application, a second appraisal and a second round of closing costs, and banks usually ask for a larger down payment on it.

People pick it for flexibility. You can shop the permanent loan once the house stands, and banks that keep these loans on their own books, including some credit unions, will finance projects a one-time close program won't touch. The price of that flexibility is qualifying twice. Lose a job or take a credit hit mid-build, and the permanent loan can fall apart right when you need it.

FHA, VA and USDA construction loan options

Short on cash for a down payment? Look here first. A veteran with full entitlement can build with nothing down on a VA construction loan, and so can a buyer in a USDA-eligible rural area who fits under the income limits. FHA's one-time close asks for 3.5%. The hard part is finding a lender that does them at all, so plan on making a few calls.

Fixing up a house you already own is a different job. A renovation loan is built for that, and our renovation financing page covers how it works.

On home construction loans, lenders approve three things: you, the builder and the project. On your side the bar sits higher than for an existing home, because the lender carries more risk until there's a finished house to secure the loan.

Your credit history is only part of the approval. Lenders also compare your new house payment and other debts with your gross monthly income. Most prefer a debt-to-income ratio in the mid-40s or lower. Our DTI calculator can help you see where you stand. Cash reserves are especially important because any construction overruns may come out of your own pocket.

1. Review your numbers before choosing a builder. Check your credit, calculate your debt-to-income ratio using the future house payment, and figure out how much cash you have for a down payment. This helps you understand your options before spending money on plans.
2. Choose your loan type. Decide between one closing or two and if you want a conventional loan or a government-backed program. Your choice affects which lenders and builders you can work with, so decide early.
3. Choose a lender-approved builder. Lenders review builders for licensing, insurance, references, and sometimes financial records. FHA requires a licensed general contractor and you can only act as your own contractor if you hold the license. Most conventional lenders won't approve owner-builders either.
4. Finalize your plans, contract and budget. You'll need detailed construction plans, specifications, a fixed-price contract, itemized costs, and building permits. Check the lot's zoning before paying for plans. Building on a Texas homestead also has legal requirements: the contract must be written and signed before work or materials begin, both spouses must sign if you're married, and the contract must be filed with the county clerk to protect the lender's lien.
5. Apply with a construction lender. Bring your income and asset documents along with the builder's package. A mortgage pre-approval up front tells you what you can borrow before you sign a building contract.
6. Get the appraisal on the finished home. The appraiser estimates the future value of the finished house, working from your plans and specs. If you already own the land, its value can cover some or all of your down payment.
7. Close and start the build. At the initial closing the lender pays for the lot if the loan buys it, or pays off your lot loan if you bought the land with separate land financing, then sets up the draw account.
8. Complete each draw and inspection. As construction progresses and the builder reaches each stage, they request funds. The lender orders an inspection to verify the work before releasing the next draw.
9. Convert to your permanent mortgage. After the final inspection and certificate of occupancy, a one-time close loan converts and your full payment starts. A construction-only loan gets refinanced instead.

Expect around 4 to 7 draws during construction. Funds are released when the builder reaches milestones, such as completing the foundation or framing, and it's not on a set schedule. You only pay interest on the funds already released so your monthly payment increases as construction progresses.

Here's how that plays out on a $200,000 build at a round 8% construction rate, an example rather than a quote:

Payments usually start low and increase as more money is drawn. If your loan also covers the lot, you'll pay interest on the amount from the beginning. For example a $60,000 lot at the same rate adds about $400 a month before construction even starts.

Some lenders will set up an interest reserve, which adds the build-phase interest to the loan so you don't write a check until conversion. That interest doesn't go away, though. You're borrowing it, and you'll pay on it for 30 years. And whichever way you handle it, don't hand your builder money ahead of the work, because the draw schedule exists so an inspector sees the work before the cash goes out.

Construction loans usually have higher rates than a standard mortgage, often about 1 percentage point higher, because lenders finance a home that hasn't been built yet. Freddie Mac's 30-year fixed survey averaged 7.24% for the week of October 29, 2026, which is a survey average and not a rate quote; your rate depends on credit, loan type, and points. Stand-alone construction loans typically have a variable rate tied to prime during the build. With a one-time close loan, you can lock in a fixed interest rate at closing and avoid rate changes later.

The rate is only part of the bill. Each draw usually comes with an inspection fee, often $100 to $500, and sometimes a title update. Lenders also commonly want a contingency line of about 10% of the construction costs built into the budget. On closing costs, a one-time close charges them once, and a two-time close charges them twice.

On that same $200,000, the fully drawn interest-only payment and a 30-year payment at a round 7% come out within a few dollars of each other. So the jump most owners feel at conversion is property taxes and insurance joining the payment, and the mortgage calculator will run that full number for your loan amount.

The finish line has paperwork of its own. Your city or county issues a certificate of occupancy, the appraiser certifies the house was built to plan (Fannie Mae's Form 1004D on a conventional loan), and the lender's inspector does a final walk. Once those clear on a one-time close loan, the interest-only months are over. Your regular payment starts with taxes and insurance added in, and those two usually run through an escrow account.

You won't need a second application, but if construction takes long enough for your credit or income documents to expire, a conventional lender may need to update the paperwork before conversion. Keep your job and credit stable until closing. Job changes, new debt or major credit changes can create problems when the loan converts. Before you make a move, read up on changing jobs during the loan.

On a construction-only loan, you close the permanent mortgage now and use it to pay off the construction loan. If the build runs long on either type, call your lender before the construction period ends; extensions are possible, though they usually cost a fee.