How Construction Financing Differs
A construction loan finances a home that is not yet complete. Instead of delivering all funds at closing, the lender generally releases money in draws as verified stages of construction are completed.
The lender reviews both the borrower and the project. That can include the builder’s qualifications, construction contract, plans, specifications, budget, timeline, land status, and projected completed value.
One-Time and Two-Time Close Options
A construction-to-permanent or one-time close loan combines construction financing and the long-term mortgage into one transaction. A two-time close structure uses one loan during construction and requires a separate permanent mortgage after completion.
The structures can differ in rate treatment, closing costs, qualification timing, and flexibility. Product availability and details vary by lender and project.
Draws, Inspections, and Changes
During construction, inspections confirm progress before draws are released. Payments during this phase may be based on disbursed funds, depending on the loan terms.
Borrowers should plan for possible cost changes, delays, upgrades, and expenses that are not included in the approved budget. Clear contracts, contingency funds, and communication among the borrower, builder, and lender help keep the project aligned.