One-Time Close, Two-Time Close, Draw Schedule, Builder Approval
Construction Loan Requirements: How to Finance Building a Home in 2026
HUD — Single Family Housing Programs
VA.gov — VA Home Loan Types
CFPB — Owning a Home
Construction loans fund the building of a new home in stages as work is completed. They carry higher rates, bigger down payments, and stricter qualification than standard mortgages. The one-time close is simpler and cheaper for most borrowers. FHA and VA versions bring the requirements down to levels most purchase borrowers can meet.
Next step:
Compare Construction Lenders
Borrower Requirements
- Credit score: 680+ for most conventional construction lenders; FHA one-time close allows 580+ with 3.5% down
- Down payment: 20–25% of total project cost (land + build) for conventional; 3.5% FHA; $0 VA for eligible veterans
- DTI ratio: 43% maximum at most lenders, calculated on the projected permanent mortgage payment after construction
- Action: Get pre-qualified before selecting a builder — the lender evaluates both you and the builder
One-Time Close
- Structure: Single loan covers construction phase and converts to permanent mortgage at completion — one closing, one set of fees
- Rate lock: Lock your permanent rate at closing, protecting against increases during the 6–12 month build period
- Programs: Available through FHA, VA, USDA, and conventional — FHA one-time close is the most accessible for lower credit
- Action: Choose one-time close if you want cost certainty and a locked rate from day one
Two-Time Close
- Structure: Separate construction loan for the build, then refinance into a permanent mortgage when the home is complete
- Flexibility: Shop for the best permanent rate after construction instead of locking 6–12 months before move-in
- Cost: Two sets of closing costs, two qualifying checks, and the risk that rates rise during the build period
- Action: Consider two-time close only if rates are declining and you want to gamble on a better permanent rate later
The Draw Process
- Disbursement: Funds released in 4–6 stages as the builder completes milestones — foundation, framing, mechanicals, finish
- Inspections: Lender-ordered inspector verifies each milestone before the next draw is released to the builder
- Contingency: 5–10% of construction budget held in reserve for cost overruns discovered during the build
- Action: Budget 10% contingency minimum — cost overruns are the leading cause of construction project failure
Frequently Asked Questions
How does a construction loan work?
Can I get a construction loan with less than 20% down?
How long does a construction loan last?
The Bottom Line Up Front
Construction loans are harder to qualify for and more expensive than standard purchase mortgages. Expect higher rates, bigger down payments, mandatory builder approval, and a draw-based disbursement process that adds inspections at every stage.
The one-time close is simpler and cheaper for most borrowers — one application, one closing, one set of fees, and a rate locked from day one. FHA and VA loan program one-time close programs bring construction financing within reach at 3.5% or $0 down. The builder matters as much as the borrower: lenders scrutinize their license, insurance, and track record before approving any construction file.
How Does a Construction Loan Work?
A construction loan funds the building of a new home in stages rather than delivering the full amount at closing. The lender approves a total project budget, then releases money in draws as the builder completes defined milestones.
During the construction phase, you make interest-only payments on the amount actually drawn — not the full loan amount. A $400,000 construction loan with $100,000 drawn means your monthly payment is based on $100,000. As more draws are released, your payment increases. When construction is complete and final inspection passes, the loan converts to a permanent mortgage or you refinance separately.
Construction Loan Basics
- Loan type: Short-term financing (6–12 months) that covers land acquisition and construction costs, then converts to or is replaced by a permanent mortgage
- Payment structure: Interest-only on amounts drawn during construction — principal payments do not begin until the permanent phase starts
- Appraisal method: Plans-and-specs appraisal based on architectural drawings and the builder’s budget, not an existing property — the appraiser estimates the completed home’s market value
- Builder requirement: The lender must approve the builder’s license, insurance, financial stability, and construction track record before any funds are disbursed
One-Time Close vs Two-Time Close: Which Is Better?
One-time close combines construction and permanent financing into a single loan. Two-time close uses separate loans for each phase. For most borrowers, one-time close wins on cost and simplicity.
The one-time close locks your permanent rate at closing, so rate increases during a 6–12 month build cannot touch you. The tradeoff: if rates drop during construction, you are locked in unless your program includes a float-down option. The two-time close lets you shop for a permanent rate after the build, but you pay two sets of closing costs and must qualify twice.
| Feature | One-Time Close | Two-Time Close |
|---|---|---|
| Number of closings | 1 | 2 |
| Closing costs | One set ($12,000–$18,000 typical) | Two sets ($20,000–$30,000 combined) |
| Rate lock | Locked at initial closing | Locked at second closing (post-build) |
| Rate risk | Protected if rates rise | Exposed to rate changes during construction |
| Qualifying | Qualify once | Qualify twice (credit, income, DTI rechecked) |
| Program availability | FHA, VA, USDA, conventional | Primarily conventional and portfolio lenders |
| Best for | Cost certainty, low-down-payment programs | Borrowers betting rates will fall during construction |
Deal Saver
FHA one-time close is the most accessible construction loan program available. It allows 3.5% down with a 580 credit score, includes the lot cost in the loan, and converts to a standard FHA 30-year fixed at completion. MIP applies for the life of the loan, but the low down payment and flexible credit requirements open construction financing to borrowers who cannot meet conventional’s 20%+ threshold.
What Are the Requirements for a Construction Loan?
Construction lenders evaluate both the borrower and the builder. Meeting borrower requirements is not enough — the builder must also pass the lender’s qualification review before the file moves forward.
Borrower Qualification
- Credit score: 680+ for conventional construction loans; FHA one-time close available at 580+; VA one-time close follows standard VA guidelines with no VA-set minimum (lender overlays typically start at 620–640)
- Down payment: 20–25% of total project cost for conventional (land + construction combined); FHA requires 3.5%; VA requires $0 for eligible veterans; USDA requires $0 in eligible rural areas
- Reserves: 6–12 months of the projected permanent mortgage payment in liquid assets after closing — this is stricter than standard purchase requirements
- DTI ratio: 43% maximum at most construction lenders, calculated on the projected permanent payment, not the lower interest-only construction payment
Builder Qualification
- Licensing: Valid general contractor license in the state where the property is being built — expired or out-of-state licenses are automatic disqualifiers
- Insurance: General liability insurance and workers’ compensation coverage must be current and adequate for the project scope
- Track record: Most lenders require a minimum of 2 years in business with references from completed projects similar in scope to the proposed build
- Financial stability: Some lenders review the builder’s financial statements to confirm they can fund the gap between draws and carry subcontractor costs
- Plans and budget: Complete architectural drawings, material specifications, and a line-item construction budget must be submitted and approved before closing
Approval Watchpoint
The builder’s qualifications determine which lenders will even consider the file. Finding a lender first and a builder second wastes time. Have your builder lined up with complete plans, a detailed budget, and their qualification package before you apply. If your builder has less than two years of experience or lacks adequate insurance, most construction lenders will decline the file regardless of your credit profile.
How Does the Draw Process Work?
Construction loans disburse funds in 4–6 stages called draws. Each draw is tied to a construction milestone, and the lender sends an inspector to verify the work before releasing the next payment to the builder.
The draw schedule is agreed upon before closing. Typical stages include site preparation and foundation, framing and roofing, mechanical systems (HVAC, plumbing, electrical), interior finish work, and final inspection. The lender holds a contingency reserve — usually 5–10% of the total construction budget — until the final draw to cover cost overruns.
Typical Draw Schedule
- Draw 1 — Site and foundation: Land clearing, grading, utility connections, foundation pour — typically 15–20% of total budget released after foundation inspection passes
- Draw 2 — Framing and roofing: Structural framing, roof installation, exterior sheathing — another 20–25% released after framing inspection
- Draw 3 — Mechanicals: HVAC, plumbing rough-in, electrical rough-in — approximately 15–20% released after rough inspection by local building authority
- Draw 4 — Interior finish: Drywall, flooring, cabinetry, fixtures, painting — 20–25% released after substantial completion verification
- Draw 5 — Final: Remaining funds including contingency reserve released after final inspection, certificate of occupancy issued, and permanent loan conversion triggered
Lender Reality Check
Cost overruns are the number one risk in construction lending. Material price increases, weather delays, and change orders can push a build 10–20% over the original budget. The 5–10% contingency reserve helps, but if total costs exceed the approved budget, you cover the difference out of pocket. Get fixed-price contracts from your builder whenever possible — cost-plus agreements transfer all overrun risk to you.
What Do Construction Loans Cost Compared to Standard Mortgages?
Construction loans carry a rate premium because the home does not yet exist as collateral. During the build phase, expect rates 1–2 percentage points above standard 30-year fixed rates.
Closing costs also run higher. A one-time close typically costs $12,000–$18,000. A two-time close runs $20,000–$30,000 combined due to duplicate origination, appraisal, and title fees. Builder’s risk insurance adds $1,500–$5,000 depending on project size.
| Cost Component | Construction Loan | Standard Purchase Mortgage |
|---|---|---|
| Interest rate (during build) | 1–2% above standard rates | N/A |
| Permanent rate (after conversion) | Market rate (may include slight premium) | Market rate |
| Closing costs (one-time close) | $12,000–$18,000 | $10,000–$15,000 |
| Builder’s risk insurance | $1,500–$5,000 (required) | Not applicable |
| Inspection fees | $300–$500 per draw (4–6 draws) | One appraisal ($400–$600) |
Can You Finance the Land in the Construction Loan?
Yes, on most construction-to-permanent programs. The total loan amount covers both land acquisition and construction costs in a single package.
If you already own the land free and clear, its appraised value counts toward your equity — potentially reducing or eliminating the cash down payment. For example, if you own a $100,000 lot on a $500,000 total project, the lot provides 20% equity, meeting the conventional down payment requirement with no additional cash out of pocket.
If you own the land with an existing lot loan balance, the construction loan pays off that balance at closing. The remaining equity above the payoff is credited toward your down payment. USDA one-time close programs also include land financing in eligible rural areas at 100% financing.
What Happens If the Build Goes Over Budget?
Cost overruns and builder problems are the two biggest risks in construction lending. The contingency reserve covers moderate overruns, but severe problems require additional borrower funds or halt the project.
If costs exceed the approved budget beyond the contingency, you fund the difference out of pocket — the lender will not increase the loan amount mid-construction. If the builder walks off the job or goes bankrupt, you need a replacement contractor willing to complete another builder’s work, which typically costs more than the original bid. Owner-builder loans exist for borrowers who want to act as their own GC, but they are rare, require 25–30% down plus documented construction experience, and are not available through FHA or VA programs.
File Guidance
Protect yourself before breaking ground: get a fixed-price contract instead of cost-plus to shift overrun risk to the builder, verify the builder carries a performance bond on projects over $500,000, and hold 10% retainage on each draw until work passes inspection.
The Bottom Line
Construction loans demand more from borrowers and builders than standard purchases — higher credit, bigger down payments, detailed plans, and an approved contractor. The one-time close is the right choice for most borrowers because it is simpler, cheaper, and locks the permanent rate from day one.
FHA and VA one-time close programs make construction financing accessible at 3.5% or $0 down. Budget a 10% contingency, get fixed-price contracts, and choose your builder before your lender. The builder’s qualifications drive which lenders will even look at the file.
Frequently Asked Questions
Are construction loan rates higher than regular mortgage rates?
Yes. During the build phase, rates run 1–2 percentage points above standard 30-year fixed rates because the home does not exist as collateral yet. After conversion to permanent financing, the rate is typically at or near standard market rates.
Can I build on land I already own?
Yes. Your land equity counts toward the down payment. If you own the lot free and clear, its appraised value is credited as equity. On a $500,000 project with a $100,000 lot owned outright, you already have 20% equity without additional cash.
What happens if construction takes longer than expected?
Extensions are available but typically cost 0.25–0.5% of the loan amount per period. Prolonged delays can trigger rate lock expirations on one-time close loans. Build realistic timelines and account for weather and permit delays.
Can I make changes during construction?
Yes, but change orders affecting the budget must be approved by the lender. Costs beyond the approved budget come from the borrower. Significant changes may trigger a plan re-review and delay draws.
Do I need a construction loan for a major renovation?
Not always. FHA 203(k) loans handle renovations within a standard FHA mortgage — Limited covers up to $35,000 and Standard handles larger projects. For work exceeding 203(k) scope, a construction loan may be required.
How is a construction loan appraised if the home does not exist yet?
The appraiser performs a plans-and-specs appraisal using the architectural drawings, material specifications, and builder’s budget. They estimate the completed home’s market value based on comparable recently sold homes in the area. The loan amount is based on the lesser of the total project cost or the appraised future value.
What credit score do I need for an FHA construction loan?
FHA one-time close requires a minimum 580 credit score for 3.5% down payment. Scores between 500 and 579 require 10% down, though few construction lenders accept scores that low due to overlays. Most FHA construction lenders set their own floor at 620–640 regardless of the FHA minimum.
Can veterans get a construction loan with no down payment?
Yes. VA one-time close programs allow $0 down for eligible veterans and active-duty service members. The VA funding fee applies unless the borrower has a service-connected disability rating. Not all lenders offer VA construction loans, so you may need to shop specifically for lenders with that program.