How to Finance your Home Build in 2022

How does the process for construction loans work?

1.) Start by prequalifying with a bank. They will help you understand how much of a loan you will qualify for.

  • Credit: Ideally as high as possible. Lenders will look for at least a 640 credit score.

  • Income: Get your debt to income ratio below 40%.

  • Down Payment: Decide how much cash you want to put down.

2.) The next step is to assemble the team -

3.) You need to obtain a detailed quote and construction schedule from your general contractor.

4.) Bring these documents to a bank for approval. The bank will make sure your general contractor is qualified and ensure that the proposed house design will meet underwriting standards.

5.) The bank will create a draw schedule that will regularly pay out disbursements to your general contractor as work milestones (typically 4-6) are completed.

6.) You close on the loan and begin construction. During the construction phase you only have to pay the interest payment on the loan.

7.) After construction completion; Depending on the loan type you entered into you will either:

  • Construction-to-Permanent Loans: This is a single-close loan that automatically converts from a construction loan into a traditional 15/30-30 loan once construction is completed. The benefit of this is that there's only one set of closing costs to pay.

  • Construction Only Loan: This kind of loan only covers the construction period. Once completed, you will either have to pay for the house in cash or obtain a traditional 15/30-yr loan. This is a riskier and more expensive option because you will have to pay two sets of closing fees and will risk losing your income and qualifying ability.

Construction Loan Financing Infographic

Construction Loan FAQs:

Can I get an Owner-Builder Loan?:

A loan where the owner acts as the general contractor. Most lenders will not underwrite these kinds of loans unless the owner has a history of successfully building houses.

If you really want to go this route in order to save some money, this can sometimes be achieved by finding a general contractor who will oversee the project for a smaller fee but not perform the work.


  • General contractors have existing sub-contractor relationships. It will be much harder to both identify and get high quality subs under contract.

  • General contractors have significant local regulatory knowledge and relationships. In certain jurisdictions, passing inspections will take many more tries with an owner-builder.

What kind of Construction Loan is right for me?:

First figure out how much you need to borrow because FHA and USDA loans have borrowing limits. Next evaluate how much you are planning on putting in as a down payment.

VA Construction Loans:

  • 0% down payment

  • Max loan size requirements (see here)

  • Limitations: Must meet military service, income and location requirements. (see here)

FHA Construction Loans:

  • 3.5% down payment

  • Max loan amounts vary by location (see here)

  • Limitations: Must meet income and credit requirements.

USDA Construction Loans:

  • 0% down payment

  • Max loan amounts vary by location (see here)

  • Limitations: Must meet income and location requirements. (see here)

Convention Construction Loans:

  • 20-25% down payment

  • No max loan value limit.

  • Limitations: Must meet income and credit requirements.

What's the Minimum Credit Score for a Construction Loan?:

This will vary by lender. A hard floor will be around a 600 credit score but most lenders have a minimum of about 640.

Have land for your construction loan already?:

This is not a problem. Most lenders will allow you to utilize the value of the land as a down payment.

What Kind of Home Should I Build:

You can build in a variety of popular styles. Right now farm house plans, ranch houses, cottage-style homes and beach house plans are very popular.

Construction Loan Interest Rates?:

These will vary depending on your credit and market conditions. In general, they are about 2% higher than the current 30-yr rate. Contact you lender for a firm interest rate quote.

How long is the duration of a construction loan?

Typically 12 months. Some can be up to 24 months if needed.

What does a construction loan include?

It can include everything; from land to permits to materials, appliances, landscaping and labor. It does not include architecture / home design fees or furnishings.

Does a construction loan limit what I can build?

Generally consumer grade construction loans are only designed for single family residences. They can be stick-built or pre-fabricated.

Should I Buy Insurance During Construction Loan?:

Your lender will require insurance before construction begins. Do not make the mistake of starting construction first because it will be very hard to get someone to insure until it is fully complete. The construction phase can be a very risky time because homes are at a high risk of fire damage before gypsum is installed. Vandalism during construction can be a common problem as well.

Back to blog