Building a home is exciting, but the financing process can feel unfamiliar if you have only experienced traditional homebuying. Construction loans work differently than a standard mortgage, and understanding those differences can help you begin your project with confidence.
This guide walks through how construction financing works, what makes it unique, and what to expect from start to finish.
What a Construction Loan Is
A construction loan is short-term financing designed to cover the cost of building a new home. Instead of receiving the full loan amount at once, funds are released in stages as construction progresses. This allows your builder to access the materials and labor needed for each phase of the project.
Once the home is complete, many borrowers transition the loan into a traditional mortgage. With some loan types, this can happen automatically through a single close process.
How Construction Financing Works
Construction loans use a draw system. This means the lender releases portions of the loan at certain milestones. Your builder will submit draw requests based on the completed work, and the lender may order inspections to verify progress before releasing the next portion of funds.
Common phases include site prep, foundation, framing, rough-ins, interior work, and final completion. This structure protects both you and the builder by ensuring funds match the actual progress of the project.
Interest-Only Payments During Construction
During the building process, most construction loans require interest-only payments on the amount that has been drawn. This keeps your monthly payments more manageable while the home is under construction.
Once the home is finished and converted into a mortgage, your payments shift to a traditional principal and interest structure.
Construction-to-Permanent Loans
Some borrowers prefer the simplicity of a construction-to-permanent loan. This option allows you to close one time at the beginning of the project, build your home, and then automatically convert to a long-term mortgage after the final inspection.
This can help you save on closing costs and avoid having to reapply once the home is complete.
What Lenders Look For
Because construction loans involve more moving parts than a standard mortgage, lenders typically review additional documentation to help set your project up for success. This may include:
• A detailed construction budget
• Blueprints or building plans
• A signed contract with a licensed builder
• Your credit, income, assets, and overall financial readiness
These items help confirm that the project is feasible and that everyone involved has a clear plan to move forward.
Why Construction Loans Work Differently Than Traditional Mortgages
Unlike an existing home, a new build does not have a completed structure to use as collateral. The draw process and ongoing inspections help protect your investment as the home takes shape. These steps also keep the project aligned with the original plan and budget.
What to Expect as You Prepare to Build
Building a home can feel overwhelming at times, but understanding your financing options helps create a smoother experience. Early planning is important, especially when it comes to timelines, budgeting, and choosing a builder whose approach matches your expectations.
Our experienced lending team is here to walk you through the process, answer questions, and help you explore financing that fits your goals. Visit a branch, call to speak with a local lender, or apply online to take the next step toward building your home.