Yes, you can get a mortgage to build a house, but it doesn’t work like a standard purchase loan. Instead of one lump sum at closing, a construction loan releases money in stages as the build progresses, and it either converts into a permanent mortgage when the home is finished or gets paid off by a separate mortgage you take out at the end. Down payments range from zero for eligible veterans using a VA one-time close loan to 20 or 25 percent for conventional construction financing, with FHA sitting at 3.5 percent for borrowers who qualify.
One Closing or Two
The first decision shapes almost everything else about the loan. You’re choosing between a construction-to-permanent loan that closes once, and a stand-alone construction loan that closes twice.
Construction-to-Permanent (Single-Close)
A single-close loan combines the construction financing and the permanent mortgage into one transaction. You close before breaking ground, the lender funds the build in stages, and the loan automatically converts to a standard fixed-rate or adjustable-rate mortgage once the home passes final inspection and receives a certificate of occupancy.1Fannie Mae. Conversion of Construction-to-Permanent Financing: Single-Closing Transactions One set of closing costs. One qualification. You lock your permanent rate before construction starts. For most people building a primary residence, this is the simpler and cheaper route.
Stand-Alone Construction (Two-Close)
A two-close loan splits the build from the permanent mortgage. You take out a short-term construction loan lasting roughly twelve to eighteen months, then apply for a separate mortgage to pay it off once the home is finished.2Fannie Mae. Conversion of Construction-to-Permanent Financing: Two-Closing Transactions You pay two sets of closing costs, qualify twice, and take on the risk that rates rise between the two closings. The upside is flexibility: you can shop the permanent mortgage market once the house exists, rather than committing to today’s rate on a home that won’t be finished for a year.
How Much You’ll Need Down
Conventional construction loans typically want 20 to 25 percent of total project cost, including the land. Lenders calculate loan-to-value against the home’s “as-completed” appraised value rather than what construction actually costs, so a lot bought cheaply in an appreciating area can work in your favor if the finished home appraises well.
Government-backed programs cut the barrier considerably. Each uses the same stage-by-stage disbursement model as a conventional construction loan.
- FHA one-time close: as little as 3.5 percent down, minimum credit score of 620, debt-to-income ratios up to 50 percent. The property must be a single-family primary residence, and the loan cannot exceed FHA county limits. Many lenders also require a contingency reserve of 5 to 10 percent of the construction budget.
- VA one-time close: no down payment for eligible service members and veterans with a Certificate of Eligibility, on a home used as the primary residence. Fewer lenders offer these, so expect to shop harder.3Veterans Benefits Administration. Eligibility – VA Home Loans
- USDA one-time close: no down payment for builds in eligible rural areas. Income limits and geographic criteria apply.
Every one of these programs lets land equity count toward your required contribution. If you already own the lot free and clear, most lenders credit the appraised value toward your down payment. If you still owe on the land, your usable equity is the appraised value minus the outstanding balance. A lot bought for $80,000 that now appraises at $100,000 gives you $100,000 in equity if it’s paid off. The land generally has to be titled in your name before the construction loan closes.
Qualifying for the Loan
Lenders set higher bars on construction loans than on standard purchase mortgages, because there’s no finished home to serve as collateral during the build.
Credit Score
For conventional loans processed through Fannie Mae’s Desktop Underwriter, there is no longer a hard minimum credit score requirement as of late 2025; the system evaluates risk holistically.4Fannie Mae. Selling Guide Announcement SEL-2025-09 For manually underwritten loans, Fannie Mae requires at least 620 for fixed-rate products and 640 for adjustable-rate mortgages.5Fannie Mae. B3-5.1-01, General Requirements for Credit Scores In practice, many construction lenders prefer 700 or higher for their best rates, because the added project risk makes them pickier than they’d be on a straightforward purchase.
Debt-to-Income
Conventional construction loans generally cap total DTI around 43 to 45 percent, counting the projected new mortgage payment against your gross monthly income. FHA one-time close loans stretch to 50 percent, which gives borrowers carrying more existing debt some room.
How the Money Actually Gets Released
Construction loans don’t hand you the balance at closing. Money flows through a draw schedule tied to milestones, and the lender controls the pace.
Draws and Inspections
A typical schedule breaks the project into five to seven stages: site prep and foundation, framing, roofing and exterior, rough mechanicals, insulation and drywall, finish work, and final completion. Before releasing funds for each stage, the lender sends a third-party inspector to confirm the work is done and meets local code. Inspection fees generally run $150 to $500 per visit and come out of loan proceeds.
Interest-Only Payments
While the build is underway, you pay interest only on what has actually been drawn. If your total loan is $400,000 but only $150,000 has been disbursed, your monthly payment is calculated on $150,000. That keeps costs manageable if you’re also paying rent or an existing mortgage. Once the final draw releases and the home is finished, the loan converts to full principal-and-interest payments.
Retainage
Most construction loans include a retainage provision: the lender holds back 5 to 10 percent of each draw until the project is fully complete. The withheld amount gives the builder an incentive to finish and gives the lender a cushion if punch-list items or code corrections appear at final inspection. Retainage is released after the home passes final inspection, lien waivers are collected from subcontractors, and the certificate of occupancy is issued.
Rates and Costs
Construction loan rates typically run one to two percentage points above standard mortgage rates. The premium reflects the lender’s added risk: they’re funding a property that doesn’t exist yet, and the loan requires site inspections and staged disbursements.
On a single-close loan, you can lock the permanent rate before construction begins. Some lenders offer extended locks covering 6 to 12 months, often for an upfront fee, part of which may be credited toward closing costs if the loan closes on time. Some programs include a one-time float-down option, letting you drop to a lower rate if the market improves during the build. Worth negotiating: a 12-month build leaves a lot of room for rates to move.
Origination fees typically run 0.5 to 1.5 percent of the loan amount, sometimes higher on smaller or more complex projects. Add the per-draw inspection fees, and total financing cost of building runs meaningfully higher than buying an existing home.
Documentation the Lender Will Want
Construction loan applications carry a heavier documentation package than a standard mortgage. Beyond your personal financials, the lender needs a full picture of the project and the team building it.
Plans and Budget
You’ll need architectural blueprints or detailed floor plans showing size, layout, and structural elements, plus a specifications document describing materials for foundation, framing, roofing, insulation, HVAC, plumbing, electrical, and finishes. Alongside the plans, lenders require a line-item budget covering permits, materials, labor, and a contingency reserve for overruns.
Builder Credentials
Lenders vet the builder independently. Expect to provide the builder’s general contractor license, proof of liability and workers’ compensation insurance, and a record of completed projects. A signed construction contract between you and the builder is required, as is the deed or purchase agreement for the land.
Site Reports
Depending on the lot, the lender may require environmental and engineering assessments before approving the loan. Federal banking guidelines call for reviews including soil stability testing, percolation results for properties on septic, flood plain analysis, and wetlands determinations.6FDIC. Construction and Land Development Lending Core Analysis Procedures These protect both sides from discovering, after the foundation is poured, that the site can’t support the build.
Approval and Appraisal
Once the lender has your financials and the project package, the file moves to underwriting. The centerpiece is a specialized appraisal: rather than valuing an existing structure, the appraiser estimates what the home will be worth once built according to your plans. This subject-to-completion value is based on recent sales of comparable new homes in the area, and it determines both approval and the maximum loan amount.
Underwriting takes longer than a standard purchase mortgage. Forty-five to sixty days is common, because the underwriter is evaluating both your finances and the feasibility of the project. The bank checks the builder’s background, confirms the budget is realistic, and verifies that the as-completed value supports the loan amount. At closing you sign the mortgage documents, pay closing costs, and the loan enters active status. Initial funds may go toward purchasing the lot or paying off an existing land loan.
Insurance While You Build
A construction site isn’t covered by a standard homeowners policy. Most homeowners policies exclude damage caused by construction activity and suspend coverage for vandalism and water damage if a property sits vacant beyond 60 days. A home under construction meets both conditions, so you need a separate builder’s risk policy.
Builder’s risk covers theft of uninstalled materials like lumber and copper piping, damage to materials in transit, vandalism on an unoccupied site, and weather damage to a partially completed structure. Some policies also cover soft costs such as additional loan interest and permit fees if a covered loss delays the project. Most construction lenders require the borrower to carry a builder’s risk policy as a loan condition. The builder may carry their own policy, but that typically covers their liability rather than your investment in the structure. Confirm who carries what before the first shovel hits dirt.
If You Want to Be Your Own Contractor
Owner-builder financing is much harder to find. Most lenders require a current general contractor’s license and documented experience building homes. Without that, approval is unlikely. Even lenders who approve licensed owner-builders may impose larger down payments, bigger contingency reserves, or lower maximum loan amounts. If you’re a licensed contractor building your own home, look specifically for lenders that offer owner-builder programs rather than trying to fit a standard construction loan.