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
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).
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.
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)
Align scope, budget, and schedule with your builder (include labor, materials, fees).
Gather land deed, survey, and property records (e.g., county assessor).
Prepare the mortgage application with financials and reserves (interest carry + contingency).
Submit contractor agreement, draw schedule, permit status, and insurance.
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.
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.
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).
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.
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.
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
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.
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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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.
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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.