Reviewed by the Editorial Team · Updated July 10, 2026 · 6 min read
A construction loan finances building or majorly rebuilding a home, releasing funds in draws as each stage is inspected and approved. Most require around 20% down and convert to a standard 15- or 30-year mortgage once the home is complete.
Key takeaways
A construction loan finances building or majorly rebuilding a home, releasing funds in draws as each stage of work is inspected and approved.
Down payment requirements typically run around 20%, higher than most standard purchase mortgages require.
A construction-to-permanent loan needs just one closing, while a standalone construction loan requires a second closing once the home is finished.
Interest is usually charged only on funds actually drawn during the build, but budget overruns and delays fall on the borrower.
Min. down payment
~20% typical
During construction
Interest-only on drawn funds
Closings required
One (converts) or two (standalone)
Best for
New builds & major rebuilds
How a construction loan works
A construction loan pays your builder in stages instead of handing over the full amount at closing. The lender releases money — called draws — as each phase of the build is completed and verified.
Construction-to-permanent: one closing that converts into a normal mortgage
Standalone construction: a short-term loan, then a separate closing into a permanent mortgage
Draw inspections confirm each stage before the next payment releases
Interest charged only on the portion of funds actually drawn
The one-time-close structure is the more popular route because it locks your permanent rate upfront and avoids qualifying twice. Once construction wraps, the loan simply rolls into a 15- or 30-year mortgage.
What it costs to qualify
Construction loans ask for more paperwork than a typical purchase mortgage. Lenders review your builder's license and track record, the construction contract, blueprints, and a line-item budget before approving anything.
Down payments typically run around 20%, higher than the minimums on many purchase loans, because the lender is financing a home that does not exist yet. Approval standards are stricter for the same reason — collateral risk is higher until the home is built.
WHILE YOU BUILD
You generally pay interest-only on the drawn balance during construction, then start full principal-and-interest payments once the loan converts to a permanent mortgage.
Who a construction loan fits
This loan is built for buyers who already have land or a contract with a licensed builder — not for browsing an open house. It suits ground-up new construction and major rebuilds alike.
Buyers building on land they already own or are purchasing
Anyone working with a licensed, lender-approved builder and firm plans
Borrowers who can document a detailed, itemized construction budget
Buyers comfortable with interest-only payments during the build phase
If you just want an existing home you can move into, a standard purchase mortgage is simpler, cheaper to originate, and faster to close.
Construction Loans: pros and cons
Pros
Funds released as building progresses
Interest often charged only on funds drawn
One closing with construction-to-permanent loans
Lets you build exactly what you want
Cons
Typically requires 20% or more down
Shorter, stricter approval timeline
Two sets of closing costs with standalone loans
Rate and budget overruns fall on you
Requirements at a glance
Licensed, lender-approved builder with signed construction contract
Detailed plans, specifications, and an itemized construction budget
Down payment of roughly 20%, though some programs allow less
Draw inspections at each milestone before funds are released
Qualification for both the construction phase and the permanent loan
Interest-only payments on the drawn balance during the build
What's the difference between construction-to-permanent and standalone construction loans?
Construction-to-permanent uses one closing that automatically converts to a standard mortgage when the home is finished. Standalone construction loans close twice — once for the build, once to refinance into a permanent loan — which means paying closing costs and requalifying twice.
How much down payment does a construction loan require?
Around 20% is typical, higher than many purchase-loan minimums. Lenders ask for more because they're financing a home that doesn't exist yet, so the down payment offsets that added risk until the structure is built and appraised.
Do I make full mortgage payments while my home is being built?
No — most construction loans charge interest-only on whatever portion of the loan has been drawn so far. Full principal-and-interest payments start once construction is complete and the loan converts to (or is refinanced into) a permanent mortgage.
Is a construction loan harder to get than a mortgage?
Yes — construction loans carry tighter underwriting than a standard mortgage because lenders are financing a home that doesn't exist yet.
Expect closer scrutiny of your builder's license and contract, a detailed budget and timeline, and a larger down payment than most permanent loan programs require.
What is the monthly payment on a $300,000 construction loan?
There's no fixed number — during the build you typically pay interest-only on the funds actually drawn, so the payment rises with each stage of construction. html">mortgage calculator using the final balance, term and rate.
Do construction loans have higher interest rates than a regular mortgage?
Yes — construction loan rates typically run higher than rates on a finished-home mortgage, reflecting the added risk of financing an unbuilt property.
Rates are usually variable during the build phase, then may reset to a market rate once the loan converts to a permanent mortgage.
Can you get an FHA construction loan?
Yes — FHA's construction-to-permanent program lets qualified borrowers combine the land, construction and permanent mortgage into a single FHA loan with a low down payment. It requires an FHA-approved builder and follows the same draw-and-inspection process as conventional construction loans.
This guide is general information, not a lending decision. Program rules and dollar limits change — verify current figures with a licensed lender and confirm licensing at NMLS Consumer Access. See all loan types.
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