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New Home Construction Financing — Turning Plans into Reality

Irakli Ezugbaia
Irakli Ezugbaia |

 

New Home Construction Financing — Turning Plans into Reality

New home construction financing is the bridge between detailed plans and a finished residence. Unlike buying an existing home with a traditional mortgage, a home construction loan is a short-term loan that releases funds in stages during the construction phase. Borrowers typically make interest-only payments on the drawn loan amount until the home is complete and the loan converts to permanent financing (a permanent mortgage or permanent loan).

This guide breaks down construction financing options, construction loan rates, eligibility, the mortgage application workflow, closing costs, and how to coordinate the builder, lender, and inspections so your construction project moves from blueprint to keys-in-hand.

👉 Read Construction-to-Permanent Loans in California: The Complete Guide

Understanding New Home Construction Financing

What it is. A construction loan funds land purchase (if needed), construction costs (materials and labor), and eligible soft costs to build your new home. Money is released via “draws” after verified progress.

Why it matters. The construction period has uneven cash needs—subcontractors, materials, inspections. Interest-only payments on drawn funds preserve cash and align payment timing with work completed.

How it differs from a traditional mortgage.

  • Incremental disbursements, not one-time funding

  • Lender inspections; cost-to-complete and collateral checks

  • Accrues interest only on disbursed funds

  • Converts to permanent financing at completion (or refinances)

Authoritative primers: CFPB’s overview of how to finance home construction and draw schedules, plus FDIC C&D guidance (linked in your pillar).

Types of Construction Loans (and When to Use Each)

Construction-to-Permanent (One-Time Close). One financing option that covers build + end-loan with a single close. During the construction phase you pay interest only; at completion it converts to a fixed home loan.
• See: FHA Construction Loans — Requirements, Process & Benefits

Stand-Alone Construction (Two-Time Close). A short-term construction loan you later refinance into the best permanent mortgage available. Offers freedom to shop the end-loan but adds a second closing.

Fixed vs. Adjustable During Build. Many lines float to an index; some lenders offer fixed pricing during the build. Your end-loan can be fixed even if the interim line floats.

Owner-Builder Construction Loans. For experienced borrowers acting as GC. Tighter underwriting and draw controls; greater savings potential.
• Guide: Owner-Builder Construction Loans

Government-backed Options.
• FHA One-Time Close and FHA 203(k) renovation (purchase/refi + rehab)
• USDA Construction-to-Permanent (rural, zero down)

Competitor educational references (rate/structure research): U.S. Bank, TD, and RenoFi construction-to-permanent explainers.

Eligibility: How to Qualify for a Construction Loan

Credit approval weighs both you and the project.

Core criteria

  • Credit score: many programs target 680+ (stronger scores can improve pricing)

  • Income/DTI: stable income documented per program rules

  • Down payment: typical LTC/LTV needs 10–25%; lot equity can help meet it

  • Plans & specs: complete, detailed plans with allowances and a 10% contingency

  • Builder: licensed home builder/GC, insurance, lien waivers, track record

  • Exit: clear path to permanent loan (owner-occupied), or sell/refi for investor builds

How to qualify (steps)

  1. Align scope, budget, and schedule with your builder (include labor, materials, fees).

  2. Gather land deed, survey, and property records (e.g., county assessor).

  3. Prepare the mortgage application with financials and reserves (interest carry + contingency).

  4. Submit contractor agreement, draw schedule, permit status, and insurance.

Construction Loan Rates and Terms

Construction loan rates are typically higher than purchase/refi rates due to short duration and active monitoring. Expect:

  • Interest-only payments during build (you pay interest on the drawn balance only)

  • Variable pricing tied to a benchmark, plus a lender margin

  • Terms commonly 6–24 months; extensions possible (fees may apply)

  • At completion, conversion to a fixed permanent mortgage or a fresh refinance

What affects pricing? Borrower risk (credit, DTI, reserves), loan-to-cost, builder quality, jurisdiction, and market rates.

Neutral rate education: U.S. Bank’s construction pages can help you benchmark offers.

The Construction Loan Process (Step-by-Step)

1) Application & Pre-Approval

  • Complete the mortgage application and upload income/asset docs

  • Provide plans/specs, fixed-bid or GMP, itemized construction costs, and draw schedule

  • If you own the lot, include title and assessor data; if not, include land purchase contract

2) Underwriting & Closing

  • Subject-to-completion appraisal, builder diligence, title review

  • You receive a Loan Estimate with closing costs and cash-to-close

  • Set builder’s risk and GL policies; confirm permits

3) Draws & Inspections

  • Lender (or third party) inspects milestones (foundation, framing, MEP rough-in, insulation/drywall, finishes)

  • Title updates confirm no unpaid liens; you sign draw requests

  • Lender monitors cost-to-complete and contingency

4) Completion & Conversion

  • Final inspection, lien waivers, Certificate of Occupancy

  • Convert to permanent financing (one-time close) or refinance into your chosen end-loan

For county lookups, see Los Angeles Assessor — Property Search. For household realistic budget tracking during the build, use Consumer.gov’s budgeting tool.

FHA Construction Loans (Quick Guide)

  • What: FHA construction-to-permanent with one closing; can include land + build

  • Qualify: FHA credit/DTI standards, approved builder, FHA appraisal, property standards

  • Benefits: Lower down payment, one close reduces rate/fee risk

  • Consider: FHA limits and standards; timing of inspections and draws

Read more at our FHA explainer and HUD’s single-close hub (linked above).

Owner-Builder Loans (Pros & Cons)

Pros: Cost control, no GC markup, vendor selection flexibility
Cons: Higher documentation, tighter draw controls, execution risk if schedules slip

Most lenders will ask for proof of experience, signed subcontractor agreements, and larger reserves. Start with our owner-builder guide for California requirements.

Budgeting, Cash Flow, and Closing Costs

A durable budget keeps your rate lock safe at conversion.

Include:

  • Construction costs (by trade), plus labor assumptions

  • Soft costs (architect/engineering, permits, utility taps, testing)

  • Contingency (often 10%) and optional interest reserve

  • Insurance and impounds setup at conversion

Closing costs appear on the Loan Estimate and include origination, third-party fees, prepaid interest, and initial escrow setup. Keep a separate household cash budget for moving, furnishings, or carrying your current home if you’re not selling first.

Choosing the Right Lender

Prioritize lenders with strong construction administration:

  • Transparent draw procedures and inspection partners

  • Clear change-order policy; lien waiver requirements

  • Program breadth (conventional, FHA/USDA, portfolio/private)

  • Local experience with your building department and utilities

Explore:


Experience Snapshot

A SoCal borrower used a one-time-close construction loan to build a 2,350-sf infill home. Because the bid included complete detailed plans, fixed allowances, and a 10% contingency, underwriting cleared quickly. Six milestone draws aligned to inspections, and interest-only payments were carried in the budget. The file converted to its fixed permanent loan on schedule—no extension fees.

FAQs (Quick Hits)

Is new home construction financing only for custom builds?
No. It also fits major renovation projects that exceed standard remodel loans.

Do I need to sell my current home first?
Not necessarily. Your DTI and reserves must qualify if you keep your current home during the build.

How long does approval take?
Plan 30–45 days for a clean file; complex sites can take longer (permits, utilities, easements).

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Author

Irakli Ezugbaia — Managing Member, Wexmoor Circle LLC
📇 CA DRE #02271654 · NMLS #2728634 · NAMP-CMP
Broker of Record: Pacific Prestige Properties, Inc (NMLS #1132725 | DRE #01900872)

With expertise in real estate investments and mortgage origination, Irakli specializes in construction financing, owner-builder projects, and FHA/Conventional loan programs.

Equal Housing Logo 40-1Wexmoor Circle LLC is an Equal Housing Opportunity Lender.

 

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Disclaimer: This article is for informational purposes only and does not constitute financial, legal, or tax advice. Loan programs and eligibility vary by lender and location. Always confirm requirements with an FHA-approved lender or mortgage broker.

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