Building a Home? Construction Loan Basics
Building a home means financing something that does not exist yet — and that changes how the loan works. Instead of one lump sum at closing, construction financing releases money in stages as the house takes shape. Here is the machinery behind it.
Draws, inspections, and interest-only payments
A construction loan disburses in draws tied to milestones: foundation poured, framing complete, drywall in, and so on. Before each draw, an inspector confirms the work is done, and the lender releases the next slice of funds to the builder.
During construction, you typically make interest-only payments — and only on the amount drawn so far, not the full loan. Your payment starts small and grows as the house does.
You pay interest only on what has been drawn. The full payment does not start until the house is finished.
One close or two?
The two-close approach uses a construction loan for the build, then a separate permanent mortgage when the home is complete. Two closings mean two sets of closing costs, but you can shop the permanent loan fresh — useful if rates drop during the build.
The one-close, or construction-to-permanent loan, wraps everything into a single closing: the construction financing automatically converts to your mortgage at completion. One set of costs, one approval, and your rate is addressed up front. Most custom-build clients we work with prefer this route for the certainty alone.
One-close buys certainty and saves a second round of costs; two-close buys flexibility on the final rate. Pick based on which risk worries you more.
What lenders scrutinize
Expect tighter requirements than a standard purchase: typically a 680-plus credit score, 10 to 20 percent down, and healthy reserves. But the lender is not just underwriting you — they are underwriting the project. They will review the builder's experience and financials, the full plans and specifications, the detailed budget, and an appraisal based on the completed value.
A note if you are buying in a production-builder community: those builders usually carry the construction financing themselves, so you only need a standard mortgage at completion. Construction loans are mainly for custom builds on your own lot.
The lender vets the builder and the budget as carefully as they vet you. A solid builder makes your loan easier.
Thinking about building in DFW? Call Steve Barton at 214.673.1319 or visit corecommunitymortgage.com and we will walk through the structure that fits your project before you sign a builder contract.
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