Buying a finished house is a one-step loan. Building one is two steps, and the first step is unfamiliar to most people. Here is how it works.
What the loan covers
A traditional mortgage covers the purchase price and closing costs. A construction loan covers the land if you do not already own it, the cost to build the house, the site development, and the closing costs. It is a short-term loan, and the lender releases it in draws as the house is built. An inspector confirms each stage is done before the next draw is released, which is why a detailed budget and a schedule tied to milestones matter to the bank as much as they matter to you.
Two steps, or one
When the house is complete, the construction loan converts or refinances into a permanent mortgage. Some lenders do this as two separate loans with two closings. Lenders who specialize in construction offer a construction-to-permanent loan: one application, one closing, and a rate locked at the start of the build. The single-close version is simpler and usually cheaper. Ask for it.
What lenders look for
Most lenders want strong credit and about 20 percent down. If you already own the land, its equity can count toward the down payment. Some lenders accept lower credit scores and lower down payments through FHA, VA, or USDA programs, and veterans can sometimes build with nothing down. Every lender will want to see the builder’s budget, the plans, and the contract before approving the loan. A cost-plus contract with a guaranteed maximum price gives them a ceiling they can underwrite, which is one of the quieter reasons we price that way.
Why the lender’s experience matters
A general bank may offer construction loans but process them rarely. The draw schedule, the inspections, and the conversion are where inexperience shows up as delay, and delay on a build costs money every week. Choose a lender who does construction loans every day and who will keep you informed through the process. We can introduce you to lenders who do this well, including the construction lending team at Nationwide Home Loans Group.
Selling your current home
Many clients sell their current house to fund the build. If you plan to, the timing is a decision in itself: sell first and rent during the build, or carry both for a while. Either way, the sale changes your debt-to-income ratio and therefore the loan you qualify for, so talk to the lender before you list.
Get the budget first
The order that works is this: a real budget from pre-construction, then a pre-approval based on that budget, then the construction agreement. Lenders cannot underwrite a ballpark, and neither should you. How our pre-construction phase works.