Construction Loan Guide 2026

I’ve watched clients spend $400,000 to build their dream home, only to panic when unexpected costs hit halfway through construction. The difference between those who sleep well and those who don’t? Understanding exactly how construction loans work before signing anything.

Construction loans aren’t traditional mortgages. They’re built for new builds and run on an entirely different schedule: money is released in stages, you pay interest only on what’s been drawn, and the lender is financing a house that doesn’t exist yet. Mistakes here can cost you tens of thousands in extra interest and fees.

Types of Construction Loans

How Construction Loans Disburse Money

Here’s what most people get wrong: you don’t receive $500,000 on day one. The lender releases money in draws tied to construction milestones.

Your builder completes the foundation. The lender’s inspector verifies the work. The first draw is released. Then framing, then rough-in for plumbing and electrical, then drywall, finishes and final completion: typically five or six draws over 8 to 12 months.

The upside: during construction you usually pay interest only on what’s been drawn. If $100,000 of a $500,000 loan has been released, you pay interest on $100,000. The trap: every delay extends that interest-only period. Three extra months on a fully drawn $400,000 balance at 7.5% is roughly $2,500 a month you didn’t plan for. Build that cushion into your budget.

Construction-to-Permanent Loans: The One-Close Option

Older-style construction financing required two closings: one for the construction loan and another for the permanent mortgage when the home was done. That meant two sets of closing costs, two appraisals and two rounds of qualifying, with the risk that your finances or rates changed in between.

A construction-to-permanent loan closes once. When construction finishes, the loan converts to a standard 15- or 30-year mortgage. Many lenders set or lock the permanent rate at the initial closing, and some offer a one-time float-down if rates fall. Ask how your lender handles the rate before you commit.

A two-time close can still make sense if you expect rates to drop, need a bigger construction budget than one-close programs allow, or plan to pay off the construction loan by selling your current home.

Construction Loan Requirements

Because the collateral doesn’t exist yet, lenders are stricter than with a regular mortgage:

• Down payment: Conventional construction loans often require 10% to 25% down. Government options are lower: FHA one-time close loans can go as low as 3.5%, and VA and USDA single-close programs can offer 0% down for eligible borrowers, though few lenders offer them.
• Credit score: Many lenders want 680 or higher for conventional construction financing; government programs may accept lower scores with lender overlays.
• DTI: Typically 45% or less.
• Approved builder: The lender will vet your builder’s license, insurance, financials and track record.
• Detailed plans and budget: Signed construction contract, blueprints, specifications and a line-item cost breakdown.
• Appraisal “subject to completion”: The appraiser values the home as if it were finished, based on the plans.
• Reserves: Some lenders require cash reserves to cover payments during the build.

If you already own the land, its equity can often count toward your down payment.

Step-by-Step: Financing a Home Build

1. Check your finances. Pull your credit, calculate your DTI, and set a total budget including land, construction, closing costs and a contingency.
2. Choose your builder. Get multiple bids, check references and licensing, and confirm the builder works with construction lenders.
3. Finalize plans and the contract. A fixed-price contract gives more cost certainty than cost-plus.
4. Apply with a construction lender. Not every mortgage lender offers construction loans, so look for one with dedicated construction staff.
5. Appraisal and approval. The lender appraises the planned home and approves the builder and budget.
6. Close and break ground. Draws begin as milestones are met and inspected.
7. Final inspection and conversion. After the certificate of occupancy, the loan converts (one-time close) or you close on your permanent mortgage (two-time close).

Budgeting for Overruns

Almost every build changes along the way. Plan for:

• A 10% to 20% contingency on top of the contract price for change orders, material price swings and surprises in the ground.
• Interest during construction at the full drawn balance for longer than scheduled.
• Costs outside the contract: permits, utility connections, landscaping, window treatments and appliances if not included.
• Rent or your current mortgage while the new home is being built.

Lenders won’t increase the loan just because the project runs over budget, so the money for overruns usually comes from your own savings.

Common Construction Loan Mistakes

• Choosing the cheapest builder rather than the most reliable one.
• Making upgrades mid-build without understanding how they’re paid for.
• Taking on new debt during construction, which can derail the final conversion or permanent loan.
• Skipping your own independent inspections at key stages.

Frequently Asked Questions

How long does a construction loan last?

The construction phase typically lasts 6 to 18 months, depending on the project. A one-time-close loan then becomes a regular 15- or 30-year mortgage.

Are construction loan rates higher?

Often, yes. The construction phase usually carries a somewhat higher rate than a standard mortgage because of the added risk. See our guide to mortgage rates for new construction.

Can I use an FHA or VA loan to build a house?

Yes. FHA and VA both allow one-time close construction loans, but fewer lenders offer them, so shop around.

What if I’m buying a new home a builder has already started?

You typically use a regular purchase mortgage and may be able to use builder incentives such as rate buydowns.