A construction contract can look straightforward until you notice what is not included: site work, utility connections, change orders, permits, interest during the build, and the reserve your builder expects you to have. To finance a construction home well, you need more than a pre-approval. You need the right loan structure, a realistic budget, and a broker who can identify a problem before it becomes a delayed closing.
Duane Buziak, NMLS #1110647, has closed $95.6M solo under one NMLS number. That experience matters in construction financing because this is not a standard purchase with one closing date and one appraisal. Your lot, plans, builder, draw schedule, and permanent loan all have to work together.
Table of Contents
- Construction financing in plain English
- One-time-close versus two-close construction loans
- A worked construction loan example
- What brokers review before approval
- Draws, inspections, and builder payments
- Common construction financing mistakes
- FAQ
What it means to finance a construction home
Construction financing pays for a home in stages rather than handing all funds to the builder on day one. The approved funds are generally released through draws as work is completed and verified. Once the home is finished, the financing either converts into a permanent mortgage or is replaced by a separate permanent mortgage.
The first decision is usually whether a one-time-close construction loan or a two-close structure fits your situation. A one-time-close loan combines construction financing and the permanent mortgage into one transaction. A two-close structure uses one closing for the build and another closing after completion.
Neither is automatically better. A one-time-close option can reduce repeat paperwork and eliminate uncertainty about needing to qualify again at completion, provided your financial profile remains within program requirements. A two-close option may make sense if you want flexibility to revisit the permanent financing later, but it creates a second qualification event and potentially another set of closing costs.
A broker can compare structures across a broad wholesale market instead of forcing a build into one limited product menu. MortgageByText works with 500+ wholesale options, which is useful when the details of the lot, builder approval, occupancy type, or loan size make construction financing less cookie-cutter.
One-time-close or two-close construction financing?
| Comparison point | One-time-close construction loan | Two-close construction loan | What to consider |
|---|---|---|---|
| Number of closings | One closing before construction begins | One construction closing, then a permanent-loan closing | Two closings can mean more documentation and more moving parts. |
| Permanent financing | Set up at the initial closing | Chosen after the home is complete | Flexibility can be useful, but future qualification is not guaranteed. |
| Rate exposure | Program terms are established upfront | Permanent terms depend on the later market and qualification | Ask how long any construction-period terms are protected. |
| Closing-cost timing | Costs are generally handled once | Costs may apply at both transactions | Compare total dollars, not just an advertised payment. |
| Best fit | Borrowers who value simplicity and certainty | Borrowers who need more permanent-financing flexibility | The lot, construction timeline, and reserves can change the answer. |
If you are comparing broker experiences, the labels matter less than the execution. Rocket Mortgage and Movement Mortgage may each offer paths that fit certain borrowers, while a wholesale broker can shop construction options based on the actual details of your build. The smart comparison is approval certainty, total cost, draw administration, builder requirements, and how quickly someone answers when a change order lands in your inbox.
Worked example: the math behind a $620,000 build
Here is a clean example using fixed numbers. Assume you are buying a $120,000 lot and building a $480,000 home. Your budget also includes $20,000 for eligible permits, plans, and financing-related project costs. The total documented project cost is $620,000.
If the required down payment is 10%, your cash contribution is $62,000. The construction loan amount is $558,000.
$620,000 total project cost – $62,000 down payment = $558,000 construction loan.
Now add the part many buyers overlook: contingency. If your builder contract allows a 5% contingency on the $480,000 construction portion, that reserve is $24,000. Whether it can be financed, how it is documented, and whether unused funds reduce the final balance depend on the program and the project file. Do not assume a contingency is optional just because your builder is confident in the initial bid.
Your payment during construction may be based on the amount actually disbursed, not the entire $558,000 from day one. That can help early in the build, but it is not free money. As draws increase, the payment generally increases too. Budget for the completed-home payment, property taxes, insurance, and any homeowners association dues – not only the first month of construction.
What gets reviewed before a construction loan is approved
The house plans and builder contract are central to the file. So are your income, assets, credit, debt obligations, down payment source, and the lot status. If you already own the lot, its verified equity may be relevant to your required contribution, depending on the program.
The appraisal is also different from a typical resale appraisal. The appraiser evaluates the proposed home based on plans, specifications, the site, and comparable properties. A high construction budget does not automatically create a matching appraised value. If projected value comes in short, you may need to adjust the project, contribute more cash, or choose a different structure.
Start with a NoTouch Credit Pull before you order plans, commit earnest money, or assume every broker sees your credit the same way. A soft pull pre-approval can provide a credit check without affecting your score, using a soft credit pull rather than a hard inquiry. That means no credit hit while you get an early read on likely qualification. NoTouch Credit Pull gives you a practical place to start without inviting a flood of phone calls.
A soft pull pre-approval is not final approval. Income, assets, appraisal, title, builder acceptance, and final underwriting still matter. But it is a much better first move than guessing based on an online payment calculator.
How construction draws actually work
Your builder usually submits a draw request after completing a defined phase, such as foundation, framing, mechanical systems, drywall, or final completion. The request is reviewed, and an inspection or other verification may confirm the completed work before funds are released.
The exact schedule should match the contract. A builder who expects large upfront payments can create an issue if the approved draw process does not support that timing. Get the draw schedule in writing before closing, and make sure it addresses inspection timing, disbursement timing, retainage if applicable, and the process for change orders.
Change orders deserve special attention. A $7,500 kitchen upgrade is not simply a design decision once construction is underway. It can affect contingency funds, project costs, appraisal support, and available loan proceeds. Ask the question before you sign it, not after the cabinet order is placed.
Mistakes that make construction financing harder
The biggest mistake is treating the builder quote as the full budget. Site preparation, grading, well or septic work, utility extensions, landscaping, driveway costs, and local requirements can be substantial. Confirm who is responsible for each line item and whether it is included in the loan budget.
Another mistake is making major financial changes mid-build. New debt, reduced work hours, large unexplained deposits, or moving money without documentation can complicate final review. Keep financial records clean, maintain reserves, and check with your broker before opening credit or moving funds.
Finally, do not choose solely on a low headline payment. Construction financing is a process product. A slightly different structure can be worth it if it better fits your builder, timeline, cash reserves, and long-term plan.
FAQ
1. Can I use land I already own to finance a construction home?
Often, yes. Verified land equity may count toward your required contribution in some programs. The title status, existing liens, and appraised value of the land all matter.
2. Do I need a large down payment for a construction loan?
It depends on the program, occupancy type, credit profile, and total project cost. VA, FHA, conventional, and jumbo construction options can have different requirements. A broker should run the actual build numbers before you assume the needed cash amount.
3. Can a VA loan be used for construction?
Some VA construction options are available for eligible veterans and service members. The builder, property, appraisal, and construction process must meet program standards. Do not confuse a standard VA purchase approval with construction approval.
4. What happens if the appraisal is lower than the total project cost?
You may need to bring in more funds, reduce the budget, modify plans, or reconsider the transaction. This is why an early appraisal strategy and realistic comparable sales review matter.
5. Can I change builders after the loan is approved?
Possibly, but it can trigger re-review, updated documentation, and delays. Builder changes are not casual administrative edits in a construction file.
6. Are construction payments the same every month?
Not necessarily. Payments can change as loan funds are drawn and the outstanding balance grows. Ask for a draw-based payment illustration that reflects your projected build timeline.
7. Does a soft pull pre-approval guarantee approval?
No. It is an early qualification tool, not a final commitment. A no hard inquiry review helps you plan, but final approval requires full documentation and property approval.
8. When should I talk to a mortgage broker?
Before signing a builder contract whenever possible. Early review can expose budget gaps, lot issues, builder documentation requirements, and qualification questions while you still have options.
Construction can be exciting without being financially casual. Get the project budget, draw schedule, lot details, and builder contract in front of an experienced broker early. For borrowers in Virginia, Florida, Tennessee, Georgia, and Washington, DC, a text conversation can replace the voicemail maze and give you a real next step.
Duane Buziak, NMLS #1110647 MortgageByText.com Coast2Coast Mortgage LLC, NMLS #376205 Top 1% nationwide | $95.6M solo production | VA Broker of the Year 2024-2025
Legal disclaimer: MortgageByText.com is operated by Duane Buziak, NMLS #1110647, under Coast2Coast Mortgage LLC, NMLS #376205. Mortgage services are offered only where licensed: Virginia, Florida, Tennessee, Georgia, and Washington, DC. Program availability, terms, approval, and construction requirements vary by borrower, property, builder, and applicable guidelines. This article is educational and is not a commitment to lend or extend credit.