A mortgage funds a house that already exists. A construction loan funds one that does not, which is why the money arrives in instalments rather than a single wire at closing. This educational guide covers the two main structures, how draws work, and the risks worth weighing first.
Why building needs a different kind of loan
Ordinary mortgage collateral is a finished home an appraiser can value. On a build it is a lot plus a set of plans, and value only appears as work is completed. Construction financing is built around that gap:
- Funds are released in stages against completed work, not upfront
- Interest is typically charged only on the amount drawn so far
- Value comes from an as-completed appraisal based on plans and specifications
The term is short, often the build plus a buffer, and the payment grows as more is drawn.
Construction-to-permanent vs. standalone construction loans
A construction to permanent loan, also called a one-time close construction loan, handles both phases in a single closing. You draw during the build, and at completion the balance converts to a long-term mortgage without a second set of costs. The permanent rate follows a mechanism agreed at the start, such as a long lock or a float-down.
A standalone construction loan covers the build only, then a separate mortgage pays it off. Two closings means two sets of costs, and you must requalify at the end — a real risk if income, credit, or rates have moved. The owner-builder loan, where you are your own general contractor, is advertised by fewer companies and expects documented experience.
How draws and inspections work
The draw schedule is the spine of the loan: agreed milestones — foundation, framing, rough-in, drywall, finishes — each releasing a set slice of funds. A cycle runs builder request, inspection, a title update showing no new liens, then release with a retainage percentage held back until completion. Change orders need approval, since the loan amount was fixed against the original plans.
What companies typically look at
- The builder — licensing, insurance, references, finances
- Complete plans and specifications with a line-item budget and a contingency reserve for overruns
- Land equity, since an owned lot often counts toward your contribution — see how financing a lot or acreage works
Costs and risks to weigh
- Overruns. Anything above the approved budget generally comes out of your pocket.
- Delays. Running past the term can mean extension fees or renegotiated terms.
- Rate exposure. On a standalone loan, the permanent mortgage is priced at market when the build ends.
- Timing. If a sale must line up with completion, how bridge loans work covers the overlap.
For an existing house, weigh home improvement and renovation loan options first.
Compare advertised offers
Draw schedules and conversion terms vary widely. Browse finance companies and compare advertised offers, then ask for them in writing.
Frequently asked questions
How does a construction loan work?
The company approves a budget against plans and an as-completed appraisal, then releases funds in stages as inspections verify the work. You pay interest only on what has been drawn. At completion the loan either converts to a permanent mortgage or is paid off by a separate one.
What is a one-time close construction loan?
It is a construction-to-permanent loan that closes once. You draw during the build and the balance converts to long-term financing at completion, avoiding a second closing and the risk of requalifying. The mechanism setting the permanent rate varies by company.
How much down payment do you need for a construction loan?
It varies by company, by program, and by whether you own the lot, since land equity often counts toward the requirement. Expectations are generally higher than on a purchase mortgage because the collateral does not exist yet. Ask each advertiser what applies.
Disclaimer: GoFunding.Shop is an advertising marketplace, not a lender, bank, broker, credit-repair company, or financial advisor. We do not approve applications, set rates, or guarantee funding. Always confirm the full terms — APR, fees, and repayment schedule — directly with the advertising company before you apply.