A construction loan finances the building of a new home rather than the purchase of an existing one. Instead of one lump-sum disbursement at closing, funds are released in stages ("draws") as construction milestones are completed and verified by an inspector.
Who it's best for
Buyers building a custom home on land they own or are purchasing, or working with a builder on new construction that isn't already complete. Not the right product for buying an already-built new-construction home from a builder's inventory — that's just a standard purchase loan.
The two main structures
- Construction-to-permanent (one-time close): One loan covers both the construction period and converts automatically into a standard mortgage once the home is complete. You only qualify and close once, and the rate is often locked upfront. Most buyers prefer this structure.
- Stand-alone construction loan: A separate short-term loan just for the build, which you then have to pay off by refinancing into a permanent mortgage once construction finishes — meaning you qualify and pay closing costs twice, and take on the risk that rates or your financial situation change between the two closings.
What lenders require
Construction loans are underwritten more conservatively than a standard purchase — lenders typically want a larger down payment (often 20%+), a detailed construction budget and timeline, a licensed and vetted builder, and sometimes builder financials. The property doesn't exist yet, so the lender is underwriting the plan and the builder as much as they're underwriting you.
Construction loan structures, down payment requirements, and draw schedules vary significantly by lender. This is general information — confirm specifics with a lender that offers construction lending.