Why it matters: Building your own home gives you control over every detail–but the financing is more complex than buying move-in ready. Here’s what to know before you build.
| Quick terms | |
|---|---|
| Draw: installment payment sent to your builder | End loan: long-term mortgage after construction |
| C2P loan: one loan that covers construction + permanent financing |
How construction loans work
Construction loans fund your home as it’s being built.
Lenders release money in draws at key stages of construction.
They may send an inspector to confirm progress.
Why they’re tougher to get
Your home is still on paper—so lenders take on more risk.
You’ll likely need everything required for a standard mortgage plus:
Detailed construction plans
A full build timetable
A project budget
An appraised value of the finished home
A higher down payment (often 20%+)
| Who construction loans are ideal for | |
|---|---|
| Buyers building a custom home | Buyers who want control over design and materials |
| Buyers building on their own land | Buyers ready for a hands-on, longer process |
Typical construction loan timeline
Application + approval: 3–6 weeks
Build time: 6–18 months
Conversion to end loan: 30–45 days
| What lenders look for | Common fees to expect |
|---|---|
| Strong credit (often 680+ for best rates) | Application fee |
| Consistent income | Appraisal fee ($600–$1,200) |
| Low debt-to-income ratio | Inspection fees for each draw |
| Cash reserves for overruns | Title updates throughout construction |
How payments work during construction
Most lenders require interest-only payments on the money drawn so far—not the entire loan amount.
Example: On a $500,000 build, your early payments may be a few hundred dollars, not thousands.
How construction loans differ from typical mortgages
| Regular mortgages | Construction loans |
|---|---|
| Run 15–30 years with fixed rates. | Assume you (not a developer) are funding the build. |
| Pay principal + interest for the life of the loan. | Shorter term, higher scrutiny, and paid in draws. |
| Typically run 1–2% higher than standard mortgage rates. |
What happens when construction is done
You’ll need a long-term mortgage–your end loan–to pay off the construction loan.
Many lenders offer construction-to-permanent (C2P) loans that automatically convert your construction loan into a standard mortgage.
Perk: One closing and one set of closing costs.
Do you need to own the land first?
No, but owning land can make approval easier because it acts as collateral. And in many cases, the land cost can be rolled into the construction loan.
| Watch out for | |
|---|---|
| Builder delays that extend loan terms | Weather disruptions |
| Changing material costs | Draw disputes between the builder and lender |
Bottom line: Building a custom home is exciting and complicated. Understanding how construction loans work helps you choose the right financing and keep your project on track.
Next step: Talk with a lender who specializes in construction financing before finalizing your plans or builder. NewHomeSource has excellent custom builders with a multitude of new floorplans.
Julie Gordey
A lifelong educator, Julie Gordey, is a retired school administrator. After years of focusing on education, this University of Texas graduate now travels and enjoys freelance writing for BDX and NewHomeSource.com.