A construction loan gives you the financing to build a new home from scratch. Instead of buying an existing property, you work with a builder to design and construct the home on land you own or plan to purchase.
Construction financing is structured differently from a standard mortgage. The loan funds are released in stages as the build progresses, and once the home is complete, the loan typically converts into a long-term mortgage.
Lender Express works with wholesale lenders who specialize in construction financing, so you have access to programs designed for this kind of project from the start.
WHAT IS A CONSTRUCTION LOAN?
A construction loan is a short-term financing tool used to cover the cost of building a home. Instead of receiving a lump sum at closing, funds are drawn from the loan in phases as the builder completes different stages of construction.
Most construction loans come in one of two forms. A construction-only loan covers the build and must be paid off or refinanced once the home is complete. A construction-to-permanent loan transitions automatically into a standard mortgage when the certificate of occupancy is issued, combining two closings into one.
Interest during construction is typically charged only on the funds drawn, not the full loan amount. This means your costs during the build phase may be lower than you expect.
KEY BENEFITS
- Build a home designed around your needs rather than buying someone else’s layout
- New construction means new systems, appliances, and materials throughout
- Construction-to-permanent programs reduce closing costs by combining two loans into one
- Interest during the build is typically based only on funds drawn, not the full amount
- Option to lock in your permanent rate before the build is complete, depending on the program
- Flexibility to build in markets where existing inventory is tight
How It Works
- You finalize plans with a licensed builder and establish a construction budget.
- The lender reviews the builder, plans, and budget before approving the loan.
- At closing, the loan is funded and construction begins.
- Funds are released in draws as each phase of construction is completed and inspected.
- You pay interest only on the amount drawn during the construction period.
- Once the home is complete and passes final inspection, the loan converts to your permanent mortgage or is paid off with a new loan.
Use our mortgage calculator to get a rough estimate of what your permanent payment might look like once the build is complete and the loan transitions.
Mortgage Calculator: https://lenderexpress.com/mortgage-calculator/
Who This Loan Is Best For
- Buyers who own land and are ready to build
- Buyers who want a custom home and cannot find the right existing property
- Buyers in areas with limited or overpriced existing inventory
- Borrowers who have already identified a licensed general contractor or builder
- Buyers who want new construction but are working outside of a large development
A construction loan is NOT the right fit for buyers who want to move in quickly, or for projects that involve improving an existing structure rather than building new. For upgrades to an existing home, a renovation loan may be the better path.
BASIC REQUIREMENTS
- Credit score minimums vary by program, but many lenders look for 680 or higher for construction loans
- Down payment is typically higher than a standard purchase, often starting at 10 to 20 percent
- Builder must be licensed, insured, and in many cases approved by the lender
- Detailed construction plans and a fixed-price contract are required
- The land must be owned or purchased as part of the transaction
- Appraisal is based on the projected value of the completed home
Requirements vary by lender and program. Your loan officer will help you understand what documentation and qualifications apply to your specific situation.