Construction loans
“Construction loan” describes at least three different products, and the one you need depends on a question most people have never been asked: are you building on land, or improving a house that already exists? The answer sends you down completely different tracks — different rules, different appraisals, different maximums, and in Texas, genuinely different law. Here is how each one works, and which of them I write.
Three roads, and I write all three.
| If you are | The product | Closings |
|---|---|---|
| Building a house from the ground up | One-time close construction-to-permanent | One |
| Buying or refinancing a house you want to renovate | HomeStyle renovation loan | One |
| Already using a builder or bank construction loan | Permanent take-out refinance | One more |
The distinction that trips people up is the middle row. A renovation loan is not a construction loan with a smaller budget — it is a different program with different limits, and on an existing house it is almost always the right instrument. Working out which one you need is the first thing to settle, because it changes every number that follows.
What I do not write: FHA 203(k). It is a real program and for some borrowers it is the right one — I just do not originate it, and I would rather say so than take you through three weeks of a file before it becomes obvious. I cover it briefly below so you can tell whether it is what you are looking for, and I will point you to someone who does it if it is.
One-time close: you sign once, at the beginning.
A single-closing construction-to-permanent loan closes before construction starts. You pay interest only on the funds drawn during the build. When the house is finished, the loan converts to permanent financing by modification — not by a second closing, not by a new loan, and not by a second set of closing costs.
What can change at conversion, and what cannot
Only four terms may be modified: the interest rate, the loan amount, the loan term, and the amortization type. Anything else forces you into a two-closing structure. And the amortization change runs one direction only — adjustable to fixed, never the reverse. That is a genuine planning tool rather than a technicality: carry an adjustable structure through the build, convert to fixed when the house is done. How the adjustable side works is worth understanding if you are going to use it.
Will you have to requalify?
Sometimes, and the rule is more forgiving than most people expect. Requalification is required if the loan-to-value rose because the property came in low, if updated credit documents were pulled, or if a modified term demands it. Otherwise the original approval carries.
Here is the provision that makes a true no-requalification build possible. Credit documents normally have to be no more than four months old. But if your original automated approval carried a loan-to-value of 95% or less, documents up to eighteen months old are acceptable at conversion. Eighteen months covers essentially any residential build. If you are near that 95% line at application, it is worth understanding what crossing it costs you a year later.
How long you get
The construction period may have no single period longer than 12 months, and the total may not exceed 18 months. Your construction documents cannot show an initial period or an extension beyond twelve months. Build that into your conversations with the builder before you sign a contract, not after the framing is late.
The strategic point: when you buy the lot changes your loan
If you already own the lot when the first construction advance is made, the transaction is a limited cash-out refinance and your loan-to-value is calculated against the as-completed appraised value, with no cost cap. If you are buying the lot with the loan, it is a purchase, and the value is the lesser of the appraised value or the sum of the lot price and construction cost.
On a build where the finished house appraises well above what it costs to put up, that difference is worth real money — and it is decided by a sequencing choice made months earlier. The structural comparison works through it properly.
One honest caveat: the agencies buy the permanent financing, not the construction loan. So the draw schedule, the contingency reserve, the interest reserve, the inspection cadence and whether you can act as your own general contractor are set by the lender and the investor, not by a published guideline you can look up and hold anyone to. Ask about all five specifically. Anyone quoting you an industry-standard contingency percentage is quoting an overlay, not a rule.
Renovation loans: Fannie Mae HomeStyle.
This finances the purchase or refinance of a house and the work you want done to it, in one loan, sized against the as-completed value. There is no separate construction loan and no take-out refinance — the renovation funds sit in an escrow the lender holds and are released to the contractor as work is completed. It is conventional, and it is the renovation product I write.
Three things decide whether it fits: the dwelling has to be staying (a complete tear-down is a ground-up build), the work has to finish within 15 months, and there is a cap on the renovation budget that is calculated differently on a purchase than on a refinance.
Before any of it, check whether you need a renovation loan at all. It is sized on what the house will be worth finished. A HELOC or a fixed second is sized on what it is worth today. If today’s value already covers the work, the second lien is usually cheaper and far simpler — no draw schedule, no contractor approvals, no completion deadline. The renovation loan earns its paperwork when the work is what creates the value.
Two pages carry the detail so this one does not have to. The renovation loan page covers the programs, what qualifies and how the process runs. Construction loan vs. renovation loan has the budget math — including the purchase cap, which is the number most likely to reshape a distressed deal — and the HELOC comparison with the figures.
One thing I do not write: FHA 203(k). The Limited 203(k) caps rehabilitation cost at $75,000, a figure HUD raised in late 2024 and reviews annually. Where it wins is credit — FHA underwriting is more forgiving than conventional, and a loan you can get beats a loan you cannot. If that is your best route I will say so and point you to someone who runs them regularly.
VA construction, and two grants worth knowing about.
VA does guarantee construction-to-permanent loans, closed before construction begins, with proceeds held in escrow and released to the builder during the build. Two features are specific to VA:
- The builder is responsible for interest during the construction period, not you. That is a real economic difference from a conventional one-time close, and it is worth confirming in the construction contract.
- The funding fee is due within 15 days of closing — not at completion, and not tied to construction milestones.
The loan guaranty certificate does not issue until VA has a clear final compliance inspection. Builders must be registered with VA, and the registration requirements were simplified in July 2025 — two certifications that every older guide still tells builders to file were eliminated. If your builder is working from a checklist someone printed a few years ago, it is out of date.
Very few lenders offer VA construction financing. That is not because it is a bad product; it is because VA does not compensate anyone for construction-phase risk, the builder carries the interest, and the registration and staged inspections add real operational work. Expect a short list of names — broker versus lender on a VA loan covers how to work a short list.
The rest of the VA picture applies to a build the same as to a purchase: how the VA loan works, the funding fee and who is exempt (and the calculator), the VA appraisal and its minimum property requirements — which on a build is done on plans and specifications — and what VA lets you pay at closing. If you have used the benefit before, entitlement restoration decides what you have left to work with.
SAH, SHA and TRA — grant money for adapting a home
If you have a qualifying service-connected disability, VA grants can fund building or adapting a home to your needs. The fiscal year 2026 maximums, effective 1 October 2025:
Specially Adapted Housing (SAH): $126,526. For loss or loss of use of multiple limbs, certain lower-extremity losses, bilateral blindness of 20/200 or less, and severe burns.
Special Home Adaptation (SHA): $25,349. For loss or loss of use of both hands, certain severe burns, and certain respiratory injuries.
Temporary Residence Adaptation (TRA): up to $50,961 for those eligible under SAH and $9,099 under SHA — for adapting a family member’s home you are living in temporarily.
The grants may be used up to six times over a lifetime, subject to the aggregate dollar cap. VA’s own web pages round two of these figures up by a dollar; the amounts above are the published fiscal-year adjustment. These change every October — check the current year before you plan around them.
Most new construction is not a construction loan at all.
If you are buying a new home from a production builder in a development, you are usually not borrowing to build anything. The builder carries the construction cost, and you close on a finished house with an ordinary purchase mortgage. Everything above about draws and construction periods does not apply to you.
What does apply is a different set of questions, and they cost real money.
You are almost certainly buying into a PUD
New developments are typically planned unit developments, which means a mandatory homeowners association, assessments, and a project review as part of your loan approval. The dues go into your qualifying payment the same way taxes and insurance do. What an HOA actually obligates you to and how an HOA changes your mortgage both matter before you sign, not after.
Your first tax bill will not be your real tax bill
Until the house is finished, the county is often still assessing land. The bill that lands after completion can be several times what the listing implied, and the escrow analysis that follows can move your payment sharply. This catches new-construction buyers more reliably than anything else on this page — how new construction taxes reset is worth ten minutes before you commit to a payment.
The builder’s lender, and the incentive attached to it
Most builders have an affiliated or preferred lender, and most attach an incentive to using them — closing cost credits, a rate buydown, an upgrade allowance. Those incentives are frequently substantial, and sometimes the affiliated lender is genuinely the best deal on the table. You cannot be required to use them, and the incentive is only worth what it is worth after you compare the total cost both ways.
That comparison is more involved than it looks, because the incentive sits on one side and the rate, the points and the fees sit on the other. It has its own page, with the contribution caps, the three places the money is allowed to land, and what each is worth if you refinance early. The short version in the meantime: get one outside quote, put both offers on the same sheet, and compare total cost over the years you actually expect to be in the house rather than the headline credit.
Two timing items worth raising early. A build that takes six to twelve months needs a rate lock long enough to survive it — extended locks exist, they cost something, and the cost is worth knowing before you sign a contract with a completion date in it. And if the appraisal comes in under the contract price on a new build, the negotiation is different from a resale, because the builder is selling forty other houses at that price. What actually happens on a low appraisal covers the options.
Four things to settle before you sign a construction contract.
Insurance changes hands mid-project
During the build the coverage is builder’s risk, not a homeowners policy, and it is usually the builder’s to carry. A standard homeowners policy attaches when there is a completed dwelling to insure. Confirm who holds what and when it switches, because the gap between the two is exactly where an uninsured loss lives.
Lien waivers are not paperwork
Every draw should be accompanied by lien waivers from the general contractor and the subs who were paid from it. A subcontractor who was not paid can attach a lien to your house even though you paid the general contractor in full. Title companies insist on waivers because this is one of the more common ways a residential build goes badly wrong.
Pennsylvania: the 60% test
Pennsylvania gives an open-end mortgage priority over mechanics’ liens where at least 60% of the proceeds are intended to pay, or are used to pay, the costs of construction. On a build where the lot payoff is large relative to the construction budget, that test can genuinely bite — and it is almost absent from consumer-facing content. If you are building in Pennsylvania on land you are buying with the same loan, this belongs in the conversation with your title company early.
Texas: building and renovating are different legal animals
To fix a lien on a Texas homestead, the contractor and the owner must execute a written contract before any material is furnished or labor performed, both spouses must sign if the owner is married, and the contract must be filed with the county clerk.
For renovation or repair of an existing Texas homestead, the constitution layers on more: the contract cannot be executed before the fifth day after you make written application for the credit, it must expressly let you rescind within three days without penalty, and it must be signed by you and your spouse only at the office of a third-party lender, an attorney, or a title company. Narrow exceptions exist for emergency repairs affecting health or safety.
Those extra requirements apply to renovation, not to new construction — and virtually every “Texas construction loan” page online conflates the two. Several also import the twelve-day rule, which belongs to Texas home equity lending and has nothing to do with a construction lien. If you are renovating a Texas homestead, the sequencing matters enormously: sign in the wrong place, or on the wrong day, and the lien is defective.
Construction lending is where the wrong structure costs the most.
On an ordinary purchase, a mediocre loan officer costs you an eighth of a point. On a build, the structural decisions — whether you own the lot at the first advance, whether it is one closing or two, whether the take-out is written as a limited cash-out or a cash-out — can move your loan-to-value, your pricing bucket and in some cases your eligibility. Those choices get made months before anyone runs a rate.
So the conversation I want is early, and it is about sequence rather than rate. When are you buying the land. Who is the builder and are they registered where they need to be. What does the construction contract say about the period and the draws. What is the house going to appraise for finished, and how does that compare to what it costs to build.
If you are still sizing the whole thing up, the affordability calculator and the cash-to-close estimator are the two worth running before we talk.
Get those right and the rate is the easy part. Get them wrong and no rate fixes it.
Questions I get asked about building.
Do I pay a full mortgage payment while the house is being built?
No. During the construction phase you pay interest only, and only on the funds that have actually been drawn. Your payment grows as the draws go out and becomes a full principal-and-interest payment when the loan converts to permanent financing at completion.
Can I lock my rate before construction starts?
On a one-time close, yes, because the loan closes before construction begins. The interest rate is one of the four terms that may be modified at conversion, so a re-set or float-down at completion is permitted by the rules, but whether your particular lender offers one is a lender feature rather than an entitlement. Ask specifically.
How long can the build take?
On a single-closing construction-to-permanent loan, no single construction period may exceed 12 months and the total may not exceed 18 months. Your construction documents cannot show an initial period or an extension beyond twelve months.
Can I be my own general contractor?
The agency guidelines do not address this, because the agencies buy the permanent financing rather than the construction loan. Whether an owner-builder arrangement is allowed is entirely a lender and investor decision, and most decline it. Ask before you plan around it.
Can I put a pool in with a renovation loan?
Yes on HomeStyle, where outdoor structures including garages, accessory dwelling units and pools are eligible where zoning permits. This is one of the clearest differences from FHA 203(k), which excludes luxury items.
What happens if the build goes over budget?
Cost overruns come out of the contingency reserve first. If that is exhausted you cover the difference, and on a two-closing structure documented construction cost overruns can be reimbursed within a limited cash-out take-out refinance. Contingency sizing is a lender overlay rather than a published guideline, so confirm the amount and who controls it before closing.
Let’s get the structure right before anyone pours concrete.
Tell me where you are in the process — land under contract, builder chosen, plans drawn, or just thinking about it. I will tell you which product fits, what the sequence should be, and where the decisions with money attached are.
Talk First
Text or email what you are planning — ground-up or renovation, the lot situation, and roughly what the finished house is worth. One business day, no pressure.
Or Get Real Numbers
Send the scenario — lot cost, construction budget, estimated finished value — and I will come back with the structure and pricing at wholesale, with the loan-to-value calculated both ways.
Send my scenario →Program requirements are drawn from agency selling guide sections on construction-to-permanent and renovation lending, HUD Mortgagee Letters 2024-13 and 2026-06, VA guidance including Circular 26-25-6, and the Federal Register notice setting fiscal year 2026 specially adapted housing grant amounts, all current as of July 2026. Draw schedules, contingency and interest reserves, owner-builder eligibility and rate lock features are lender and investor overlays, not published guidelines. Nothing here is legal advice; construction lien law is state-specific and an attorney earns their fee on it. Forest Hills Mortgage · Matt Mergo · NMLS #563819. Equal Housing Opportunity.