Building a home is not the same as buying one, and your financing should not work the same way either. If you plan to build, a construction loan may help cover eligible construction costs, land expenses and other approved project costs, depending on the program.
A traditional mortgage is designed for a completed home, not a property that is still being built. Construction loans bridge that gap by releasing funds as each milestone in the draw schedule is reached. Before starting a project, it helps to understand your overall budget and buying power; the max purchase price calculator can estimate what may fit within your plans.
Construction loan qualification at a glance
- Minimum credit score
- Many lenders look for a score around 680 or higher, but requirements vary by program
- Down payment
- A larger down payment is typical for many conventional construction loans, based on the projected completed value. Government-backed options and other programs may have different requirements
- Loan types
- Construction-to-permanent (one-time close) or standalone construction loan
- Structure
- A construction phase, followed by permanent mortgage financing based on the program and your eligibility
- Disbursement
- Funds are released through a draw schedule tied to construction milestones
- Documentation needed
- Builder contract, approved plans, permits, construction timeline and lender approval of the builder
These are general educational guidelines. Actual requirements depend on your lender, loan program, builder, project details and financial profile.
construction_infographic · 1600×900Construction loan requirements 2026: what lenders look for
Construction loan requirements depend on more than your credit score. Lenders check your finances and look at your builder, plans, permits and savings before they approve a loan. Because the home is not built yet, they also want to understand the building timeline, costs, and whether the plan is realistic. Common requirements include:
- A credit profile that meets your lender’s requirements for the program and your overall financial profile.
- A down payment that meets your construction loan program’s requirements, often based on the projected completed value. Government-backed programs and other lender options may differ.
- Stable income and sufficient cash reserves to cover unexpected costs.
- An approved builder with a signed construction contract.
- Complete building plans, permits and a clear construction timeline.
Your lender may order an appraisal to estimate the home’s value after construction, which helps determine how much you may be able to borrow. Higher-cost projects may require a jumbo loan with different guidelines.
How it works with Wonder Rates
- 1
Bring us your plans and builder contract
Your loan officer reviews your builder, construction plans, lot details and financial profile to help identify potential financing options.
- 2
Choose one-time close or standalone
Many borrowers choose a construction-to-permanent loan because it combines construction and permanent mortgage financing into one closing.
- 3
Funds are released through a draw schedule
After a construction milestone is completed and inspected, funds may be released according to the approved schedule.
- 4
Your financing transitions after construction
With a one-time close loan, construction financing may convert into permanent mortgage financing after completion, based on your loan agreement and program.
How a construction loan draw schedule works
This is the part most first-time builders find confusing, so here is the plain version. Instead of receiving your full loan amount at closing, your builder gets paid in portions as the work happens. Each portion is called a draw, and it is tied to a specific construction milestone. A typical draw schedule looks something like this:
- 1
Foundation
the lot is prepared and the foundation is poured.
- 2
Framing
the home’s structural frame is completed.
- 3
Mechanical
plumbing, electrical and HVAC systems are roughed in.
- 4
Finish
interior finishes, fixtures, flooring and final details are completed.
Before each payment, an inspector checks the completed work to make sure the project follows the approved plans.
How construction loan payments work
Construction loan payments work differently from traditional mortgage payments because the home is still being built. During the construction phase, borrowers typically make interest payments based on the funds released so far through the draw schedule, so the payment may change as construction progresses and more funds are drawn.
After construction is complete, a construction-to-permanent loan may convert into permanent mortgage financing. Depending on the program and your eligibility, that permanent mortgage may be structured as a conventional loan or another available option, and principal and interest payments begin under the loan agreement. Payment structure, conversion timing and loan terms vary by lender and program; your loan officer can explain what to expect before construction begins.
construction_video · 16:9 embedA licensed loan officer can walk you through your own numbers, in English or Tiếng Việt.
Call 408-600-1900Who a construction loan is for
The custom home builder
You already own land but cannot find an existing home that matches your vision. A construction loan can help you finance the home that fits your needs instead of compromising on an existing property.
The buyer purchasing land and building together
You have not bought a lot yet, and you want to finance the land and the build as one package. Many construction-to-permanent loans can be structured to cover both.
The tear-down and rebuild
You found the right location, but the existing structure needs to come down. Construction financing can cover demolition and the new build, rather than financing a home that will not exist by the time you move in.
Pros and cons
Pros
- One-time close options may combine construction and permanent financing into one loan process
- Interest-only payments during construction may help manage cash flow while building, depending on the loan structure
- Financing may cover the lot, construction costs or both, depending on the program
- Lets you create a custom home based on your plans and needs
Cons
- Often requires a larger down payment compared with some traditional mortgage programs
- Most lenders require a licensed, approved builder to oversee the project
- Draw inspections add extra steps during the construction process
- Unexpected construction costs or delays may require additional funds
Construction loan vs. renovation loan: which do you need?
Both loans help finance residential projects, but they serve different purposes. Your choice depends on whether you are building a new home or upgrading an existing one.
| Construction loan | Renovation loan |
|---|---|
| Builds a new home from the ground up | Repairs, remodels or upgrades an existing home |
| May finance the purchase of land and construction, depending on the program | Used when buying or refinancing a home that needs improvements |
| Funds are released in stages through a draw schedule as construction progresses | Renovation funds are released according to the program and approved renovation scope |
| Requires approved building plans, permits and a lender-approved builder | Typically requires renovation plans and contractor information, depending on the program |
| A construction-to-permanent loan converts into a standard mortgage after completion | Remains a purchase or refinance mortgage with renovation financing built in |
A construction loan is typically the right fit for building a brand-new home. For an existing home that needs repairs, remodeling or upgrades, a renovation loan is generally the better choice.
This is not a commitment to lend. Individual eligibility depends on lender review of your full financial profile, builder and construction plans.
Wonder Rates compares Construction options across multiple wholesale lenders.