Construction Loans: What Happens Between the Lot and the Keys
Ground-up financing is a different animal from a purchase loan. Here is the structure, the draw process, and the decisions to make early.
Building is the only way many buyers get exactly the house they want, and the financing scares most of them away. It should not. The structure is logical once you see it laid out.
How the money moves
The lender approves a total budget but does not hand it over. Funds are released in draws as stages complete: foundation, framing, mechanical rough-in, drywall, finish, and completion. An inspector verifies each stage. You pay interest only on the money actually drawn, so early payments are small and grow through the project.
Single close or two close
A single-close loan sets your permanent rate at the beginning and converts automatically when the certificate of occupancy is issued. One closing, one set of fees, rate certainty.
A two-close structure means a construction loan now and a separate permanent mortgage later. It costs more in fees but lets you shop the permanent rate at completion and change course if the project scope shifts.
The budget is the application
Your line-item budget receives more scrutiny than your pay stubs. Every allowance should be realistic, and a contingency of 10% to 15% is expected. Underfunded budgets are the leading cause of stalled projects, and a stalled project is expensive for everyone.
Your builder is part of the file
Lenders underwrite the builder as well as the borrower: license, insurance, references, financial capacity, and completed projects. Choose the builder before you apply, and expect the lender to ask for their paperwork alongside yours.
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