A construction loan is a short-term loan that provides funds to build a home. Funds are disbursed in draws as construction progresses. After construction is complete, the loan converts to a permanent mortgage (construction-to-permanent loan). You pay interest only during construction. Requirements include a detailed building plan, contractor contract, and typically 20% down.
How Construction Loans Work
You get approved for a construction loan based on the projected value of the completed home. Funds are disbursed in stages (draws) as the builder completes milestones: foundation, framing, roofing, rough-ins, drywall, finishes. You pay interest only on the amount drawn during construction. After completion, the loan converts to a permanent mortgage with principal and interest payments.
Requirements for a Construction Loan
Credit score: typically 680+. Down payment: 20-25% is common. Builder contract: fixed-price or cost-plus contract. Building plans: detailed plans and specs. Appraisal: based on the after-construction value (plans and specs appraisal). Construction timeline: typically 6-12 months. Contingency reserves: 5-10% of the budget for unexpected costs.
Construction Loan Timeline
Month 1-2: planning, permits, and site preparation. Month 3-5: foundation and framing. Month 6-8: rough-ins (electrical, plumbing, HVAC) and drywall. Month 9-11: interior finishes, cabinets, flooring, paint. Month 12: final inspection and conversion to permanent mortgage. The total timeline varies by home size and builder.