What Is a Construction Loan?

Introduction

A construction loan finances building a new home. Funds are disbursed in draws as construction progresses. The loan may convert to a permanent mortgage (one-time close) or require a separate closing (two-time close). See What Is a Renovation Loan, What Is an FHA 203k Loan, and What Is a Conventional Loan.

Frequently Asked Questions

What is a construction loan?

A construction loan finances building a new home. Funds are typically disbursed in draws as construction milestones are met. The loan may convert to a permanent mortgage or require a separate closing.

How do construction draws work?

The lender releases funds in stages (draws) as construction progresses—e.g., foundation, framing, rough-in, final. An inspector usually verifies each stage before the next draw.

What is one-time vs. two-time close?

A one-time close (construction-to-permanent) combines construction and permanent financing in one loan. A two-time close has separate construction and permanent loans.

What are typical requirements?

Lenders typically require a construction contract, detailed budget, approved plans, and often a larger down payment. Credit and income requirements may be stricter than for a purchase.