Building a home means paying for it in stages, so the financing works differently than a normal purchase loan. A construction loan funds the build as it happens.
How it is paid out
Instead of one lump sum, the lender releases money in stages, called draws, as each phase is finished (foundation, framing, and so on). During the build you usually pay interest only on the amount drawn so far.
One loan or two
- Construction-to-permanent: one loan that converts into a regular mortgage when the home is done, with a single set of closing costs
- Standalone construction: a short-term loan for the build that you refinance into a mortgage afterward
What lenders want to see
Expect more documentation than a standard purchase: builder details, plans, a budget, and a timeline. A solid down payment and good credit help, since there is no finished home as collateral yet.
A construction-to-permanent loan can save you a second round of closing costs. Ask which structure fits your project before you break ground.