Construction Loans: Finance Your Custom Home Build

A construction loan funds your home before it exists — disbursed in draws as each phase is built, then converts to a permanent mortgage at completion. Compare USDA, FHA, and conventional options and check your eligibility before you break ground.

Check eligibility for a construction loan
New home under construction with framing visible against a clear sky

Construction Loan at a Glance

Down payment

$0 (USDA) · 3.5% (FHA) · 5–20% (conventional)

Construction period

Typically 6–12 months

Payments during build

Interest-only on amount drawn

After construction

Converts to 30-year fixed mortgage

Builder requirement

Licensed, insured, fixed-price contract

What can be financed

Land + construction + closing costs

Check Eligibility for a Construction Loan

Takes about 2 minutes · No credit check · No obligation

Not all lenders offer construction-to-permanent loans. Connect with one who does — they'll confirm which program you qualify for, review your builder, and walk you through the process before you sign a contract.

  • NMLS-licensed lenders
  • See options with no initial credit impact

How it works

  1. 1Enter your info — takes about 2 minutes
  2. 2Get matched with lenders who do construction-to-permanent loans
  3. 3Get your official eligibility and construction loan answer from a matched lender

How a Construction Loan Works

The loan funds before a single wall goes up — then releases money in stages as construction progresses, so neither you nor the lender is exposed before work is verified.

Phase 1

Application & approval

You apply before construction begins — before anything is built. The lender reviews your income, credit, and down payment, plus your builder's license, insurance, and fixed-price contract. The loan is approved based on the "as-completed" appraised value of the future home.

Phase 2

Construction draws

The lender doesn't release the full loan amount at once. Funds are disbursed in stages — called draws — as each phase of construction is completed and inspected. Common draw milestones: foundation, framing, mechanical rough-in, drywall, and final completion.

Phase 3

Interest-only payments

During construction you pay interest only on the amount drawn so far, not the full loan balance. Payments start small and grow as more funds are released. The construction period is typically 6–12 months depending on the program and lender.

Phase 4

Permanent loan conversion

When construction is complete and a final inspection passes, the loan converts to a standard permanent mortgage — usually a 30-year fixed. With a single-close (one-time close) loan this happens automatically with no second closing, no second appraisal, and no second underwriting.

Construction Loan vs. Builder-Financed New Construction

Not every new home requires a construction loan. The path you need depends on whether the builder or you is financing the build.

No construction loan

Spec home

Builder financed — regular mortgage

The builder already constructed the home at their own expense. You buy it finished (or nearly finished) with a standard purchase mortgage — FHA, VA, USDA, or conventional. No construction loan needed.

No construction loan

To-be-built / pre-sale

Builder financed — regular mortgage at closing

You pick a floor plan from the builder's catalog before construction starts. The builder finances the build themselves. You get a standard mortgage at closing when the home is complete. Still no construction loan on your end typically.

Construction loan required

Custom build

You finance it — construction loan

You own (or are buying) land, you hire a builder, and they build to your specs. You finance the construction yourself with a construction loan. Maximum customization, more process. This is where USDA, FHA, and conventional construction loans apply.

Which Construction Loan Is Right for You?

Three main programs cover most custom-build scenarios. Start with USDA if you might qualify — it's the most affordable. Fall back to FHA or conventional based on your down payment and location.

Best deal if your area is eligible

USDA Construction Loan

$0 down

Rural and suburban areas, income limits apply

Pros

  • No down payment — 100% financing
  • Same low guarantee fee as USDA purchase (1% upfront + 0.35% annual)
  • Single-close construction-to-permanent

Considerations

  • —Property must be in a USDA-eligible area
  • —Household income limits apply (115% of area median)
  • —Builder must be lender-approved
Check USDA Construction Loan Eligibility

FHA Construction Loan

3.5% down

Buyers with lower credit or smaller down payment anywhere in the U.S.

Pros

  • Low 3.5% down payment
  • Credit score 580+
  • No location restrictions

Considerations

  • —FHA MIP applies for life of loan (with < 10% down)
  • —Loan limits by county
  • —Builder must be FHA-approved
Check FHA Construction Loan Eligibility

Conventional Construction Loan

5-20% down

Buyers with good credit who want flexibility on location, loan size, or builder type

Pros

  • No income or location limits
  • PMI drops off at 20% equity
  • Owner-build possible with some lenders
  • Jumbo amounts available

Considerations

  • —5–20% down payment required
  • —Stricter credit requirements
  • —Two-close options may add closing costs
Check Conventional Construction Loan Eligibility

VA Construction Loan

$0 down

Eligible veterans, active-duty service members, and surviving spouses

Pros

  • No down payment
  • No monthly mortgage insurance
  • Competitive VA rates carry over to permanent loan

Considerations

  • —Must have VA eligibility (Certificate of Eligibility)
  • —VA funding fee applies
  • —Fewer lenders offer VA construction vs. VA purchase
Check VA Construction Loan Eligibility

The key difference from a purchase loan: With a construction loan, the collateral doesn't exist yet. The lender approves the loan based on your finances, your builder's qualifications, and the as-completed appraised value — an appraisal of the home as it will be built based on the plans and comps. This is why the lender reviews the builder so carefully and releases funds in stages rather than all at once.

Construction Loan Resources

USDA Construction Loan

Build in an eligible rural or suburban area with $0 down. Single-close with the same guarantee fees as a USDA purchase loan.

See USDA construction details →

FHA Construction Loan

Build anywhere in the U.S. with 3.5% down. Single-close FHA construction-to-permanent — not a 203(k) renovation loan.

See FHA construction details →

Check USDA Eligibility

Confirm whether your build site and household income qualify for a USDA loan before you start.

Check eligibility →

FHA Loans

3.5% down, credit-flexible, no location restrictions. A fallback for buyers who don't qualify for USDA.

FHA loan overview →
Ready to build?

Get Matched with a Construction Lender

Construction-to-permanent loans aren't offered by every lender. The form above connects you with lenders who specialize in construction financing — they'll confirm which program fits your situation, review your builder, and check your eligibility before you sign any contracts.

Check eligibility for a construction loan
Couple standing in front of the custom home they built with a construction loan

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Construction Loan FAQ

What is a construction loan?

A construction loan — sometimes called a new construction loan or loan for new construction — funds the building of a home that doesn't exist yet. Unlike a standard mortgage where you borrow against an existing property, a construction loan disburses funds in stages — called draws — as each phase of construction is completed. You pay interest only on the amount drawn during the build. When construction is complete, the loan either converts to a permanent mortgage (single-close / one-time close) or you refinance into one (two-close).

Is a new construction loan the same as a construction loan?

Yes — "new construction loan" and "loan for new construction" are common ways people search for the same product. Whether you call it a construction loan, a new construction loan, or a construction-to-permanent loan, the mechanics are the same: the lender funds the build in draws, you pay interest-only during construction, and the loan converts to a permanent mortgage when the home is complete. The terminology varies by lender and region, but they all refer to the same financing structure for homes that haven't been built yet.

How are construction loan draws released?

The lender sets a draw schedule tied to construction milestones — commonly foundation completion, framing, mechanical rough-in, drywall, and final completion. At each milestone, an inspector verifies the work is done before the lender releases the next draw. This protects both the borrower and lender from paying for work that hasn't been completed. You only pay interest on the cumulative amount drawn, so payments are lower early in the build and increase as more funds are released.

Do I have to pay on the loan before I move in?

Yes — but only interest-only payments on the amount drawn so far, not the full loan balance. Early in construction when only a fraction of the loan has been drawn, these payments are relatively small. As draws accumulate they grow. Full principal and interest payments begin only after the loan converts to the permanent mortgage, which happens at construction completion.

What is a one-time close loan?

A one-time close loan — also called a single-close or construction-to-permanent loan — combines the construction financing and the permanent mortgage into a single closing. One application, one approval, one set of closing costs, before construction begins. When the home is complete, the loan converts automatically to the permanent mortgage with no second appraisal and no second underwriting review. A two-close loan has two separate transactions: a construction loan you close first, then a refinance into a permanent mortgage when construction is done. Two-close means two sets of closing costs but sometimes lets you shop for a better permanent rate at conversion. USDA construction loans are always single-close; conventional and FHA lenders offer both depending on their program.

Can I build my own home (owner-build) with a construction loan?

Most conventional lenders allow owner-build with some lenders if you can demonstrate general contractor experience. USDA and FHA construction loans do not permit owner-build — you must use a licensed, insured third-party builder. If you want to act as your own GC, conventional construction financing is your primary option, and you'll need to show lenders your qualifications.

Can a construction loan include land?

Yes. If you don't already own the land, most construction loans allow you to roll the land purchase into the loan. If you already own the land, its equity may count toward your down payment or loan-to-value calculation, depending on the lender. Discuss your land situation upfront — whether you're buying land simultaneously or already own it affects how the loan is structured.

What is the difference between buying a new home from a builder and a construction loan?

When you buy from a builder's inventory — a "spec home" or a to-be-built floor plan from the builder's catalog — the builder finances construction themselves. You get a regular mortgage at closing when the home is done or nearly done. A construction loan is for custom builds where you own the land, you hire the builder, and you're financing the construction yourself. The tradeoff: more customization and control with a construction loan, less complexity with builder-financed new construction.

What is a USDA construction loan?

A USDA construction loan is a construction-to-permanent loan backed by the U.S. Department of Agriculture for eligible rural and suburban areas. It offers $0 down payment — the same benefit as a USDA purchase loan — with a single-close structure and low guarantee fees (1% upfront + 0.35% annual). The property must be in a USDA-eligible area, household income must be at or below 115% of area median, and the builder must be licensed and lender-approved. Not all USDA-approved lenders offer construction loans — fewer lenders do this than standard USDA purchase.

What is an FHA construction loan?

An FHA construction loan uses FHA's one-time close program to finance a new custom build with as little as 3.5% down. It's available anywhere in the U.S. — no location restrictions like USDA — and accepts credit scores as low as 580. FHA MIP (mortgage insurance premium) applies for the life of the loan with less than 10% down. The builder must be FHA-approved. Note: the FHA 203(k) is a different product — it's a renovation loan for existing homes, not new construction.

What is a VA construction loan?

A VA construction loan is a construction-to-permanent loan available to eligible veterans, active-duty service members, and surviving spouses. Like a VA purchase loan, it requires no down payment and no monthly mortgage insurance. The VA funding fee still applies and is typically rolled into the loan. The builder must meet VA requirements. VA construction loans are harder to find than VA purchase loans — fewer lenders offer them — but for eligible borrowers who want to build, it's the best deal after USDA if the property is in an eligible area.

What is a conventional construction loan?

A conventional construction loan is construction financing that isn't backed by a government program (USDA, FHA, or VA). It offers the most flexibility: no income limits, no location restrictions, owner-build possible with some lenders, and jumbo amounts available for higher-cost builds. Down payment is typically 5–20% depending on the lender and loan size. PMI applies if you put less than 20% down but drops off once you hit 20% equity. Both single-close and two-close structures are available.

Which construction loan is best — USDA, FHA, VA, or conventional?

Start with VA if you're eligible — $0 down, no mortgage insurance, and the funding fee is the only ongoing cost. If you're not VA-eligible, check USDA next — $0 down in eligible rural and suburban areas with low guarantee fees. If the build site isn't in a USDA-eligible area or you exceed income limits, FHA is the next step down — 3.5% down, available anywhere, flexible credit. Conventional is the most flexible overall — no location or income limits, owner-build options, jumbo amounts — but requires the largest down payment. Most buyers should exhaust VA → USDA → FHA before defaulting to conventional.

How hard is it to get a construction loan?

Construction loans are more complex than purchase loans because the collateral (the home) doesn't exist yet. Lenders require a fixed-price builder contract, a detailed construction budget, and a licensed, insured builder. Underwriting reviews the "as-completed" appraisal, the borrower's finances, and the builder's qualifications. Not all lenders offer construction-to-permanent loans — working with one who regularly does them reduces friction significantly.