Ready to build your dream home? Explore our construction home loans.

Financing a home that doesn’t exist yet works differently from buying one that does. There’s no completed property to appraise, no move-in date to close on, and no single lump sum handed over at signing. Instead, the lender is underwriting a plan — your finances, your builder, your budget, and the value the finished home is expected to reach.

Here’s how construction financing is structured, what lenders evaluate, and what to understand before starting a project.

What Is a Construction Loan?

A construction loan is financing used to build a new residential property or complete substantial renovations to an existing one. Funds may cover eligible expenses such as materials, contractor labor, permits, and other approved project costs.

Two features distinguish it from a traditional mortgage. First, money is released in stages rather than all at once. Second, the loan is short-term by design — it either converts to permanent financing or gets paid off by a separate mortgage once the home is finished.

How Draws Work

The draw process is the mechanic that defines construction lending, and it’s worth understanding before you start.

Funds are released in installments tied to completed phases of work — foundation, framing, mechanical systems, drywall, finish work. Before each release, the lender typically orders an inspection to confirm the work is actually done. Only then are funds disbursed, generally to the builder rather than to the borrower.

During construction, you typically pay interest only on the amount drawn to date, not on the full approved loan. That means payments start small and increase as the project progresses. If you’re also paying rent or an existing mortgage during the build, that rising payment needs to fit your budget.

The draw schedule is negotiated up front and matters more than most borrowers realize. Builders need funds to keep the project moving, and a schedule that lags behind actual work can create friction on the job site.

Types of Construction Financing

Construction-to-Permanent

Combines the construction phase and long-term mortgage into a single loan structure. Once building is complete and applicable requirements are satisfied, the loan may transition into permanent financing without requiring a separate mortgage. One closing, one set of closing costs.

Construction-Only

Finances the building phase alone. When construction finishes, the balance must be repaid or refinanced into separate long-term financing. This means two closings and two sets of costs, and it carries a real consideration: you’ll need to qualify again at the end, under whatever guidelines and market conditions exist at that time.

Renovation Loan

Provides financing for eligible improvements to an existing property. Depending on the program, renovation costs may be incorporated into financing used to purchase or refinance the home.

Owner-Builder

Some lenders offer construction financing to qualified borrowers acting as their own general contractor. These programs typically carry additional experience, licensing, financial, and project-management requirements, and many lenders don’t offer them at all.

End Loan

Also called a take-out loan — long-term financing used to repay a construction or interim loan once the project is complete.

Which structure fits depends on your project type, whether you already own the land, builder involvement, available funds, and lender requirements.

What Lenders Evaluate

Construction underwriting has two halves: you and the project.

The Borrower

Credit history, income, assets, existing debts, and reserves are all reviewed. Credit standards are often higher than for a completed-home purchase, and requirements vary by lender and program. Debt-to-income ratio matters as well — lenders evaluate whether you can manage existing obligations alongside construction payments and the eventual permanent mortgage.

Reserves get particular attention here, because construction projects routinely cost more than budgeted. Lenders want to see funds available beyond the project budget.

The Project

This is where construction lending diverges most from standard mortgage underwriting. Lenders evaluate:

• The builder. Licensing, insurance, financial standing, and track record. Lenders can and do decline builders. If you have someone specific in mind, confirm they’re acceptable before signing a construction contract.
• Plans and specifications. Architectural drawings and detailed finish specs.
• The budget. A line-item cost breakdown, not a summary figure.
• Timeline. A realistic construction schedule.
• Permits. Evidence that required approvals are in place or obtainable.
• Appraised value. The property is appraised based on plans and specifications — what the completed home is expected to be worth. Loan amounts are calculated against that projected value.

Documentation

Expect to provide both financial and project records: architectural plans, builder information and contracts, permits, a detailed budget, and a construction schedule, alongside income documentation, asset statements, and credit information. Periodic inspections during the build are required before additional draws are released. Requirements vary by lender and program.

Planning for What Goes Wrong

Construction projects encounter delays and cost overruns with some regularity. Weather, material availability, subcontractor scheduling, permit timing, and changes you decide to make along the way all affect both budget and completion date.

A contingency reserve — funds set aside beyond the construction budget — is standard practice for good reason. Some lenders require one.

Change orders deserve specific attention. Modifications after the loan closes typically require lender approval, can affect the draw schedule, and may not be covered by the approved loan amount. Locking in your decisions before construction starts saves considerable friction later.

Comparing Lenders

Construction programs vary more between lenders than standard mortgages do. Worth comparing:

• Which loan structures are offered
• Down payment requirements, and whether land you already own counts toward equity
• Rate structure during construction and how the permanent rate is determined
• Closing costs, and whether one closing or two applies
• Draw procedures, inspection requirements, and turnaround time on disbursements
• Maximum construction period, and what happens if the project runs long
• Builder approval requirements

Getting Started

All financing is subject to underwriting, income and asset verification, builder and project approval, appraisal, and applicable lender guidelines. Terms depend on borrower qualifications and project details.

If you’re planning to build or substantially renovate, the useful first conversation happens before you sign a construction contract — builder requirements and loan structure both affect decisions you’ll make early. We’re glad to walk through the options and help you determine which programs may be appropriate for your project.