You close on a construction loan at the start of the project, generally 30 to 60 days after you apply, once the lender has signed off on your finances, your builder, and the plans. If you chose a two-close structure, you close a second time after the home is finished and receives its certificate of occupancy. If you chose a single-close (construction-to-permanent) structure, there is no second closing — the loan converts automatically to a permanent mortgage when the build is done. The construction phase between those points typically runs 12 to 18 months.
What Has to Happen Before That First Closing
The 30-to-60-day window before closing isn’t idle time. Construction loan underwriting is heavier than a standard mortgage because the lender is financing something that doesn’t exist yet, and several pieces have to line up before a closing date can be set.
On your side, the lender wants the usual mortgage paperwork — tax returns, pay stubs, bank statements, debt disclosures — along with a down payment of 20% to 25% of the projected completed value. That’s well above the 3% to 5% some conventional mortgages allow, and it reflects the added risk of lending against an unbuilt home.
The lender also vets your general contractor. Expect to document the builder’s licensing, liability insurance, and in some cases a minimum number of completed projects. You’ll need finalized construction plans, blueprints, and a detailed cost breakdown so the lender knows exactly what’s being built and at what price.
A separate piece that often controls the timeline is the “as-completed” appraisal, which estimates what the home will be worth once finished. That number sets the ceiling on your loan. Federal banking guidance limits construction loans for one- to four-family homes to 85% of appraised value, so most lenders cap the loan-to-value ratio at 80% to 85%.1Federal Reserve. FAQs on the Calculation of Loan-To-Value Ratio for Real Estate Loans
Building permits must be secured before closing, and the lender needs clear title to the land — either already in your name or purchased simultaneously with the loan. Once all of this is assembled and the closing disclosure goes out, the first closing is scheduled. Complex custom builds can push that initial window beyond 60 days.
What the First Closing Actually Looks Like
The initial closing takes place at a title company or attorney’s office and formally authorizes construction to begin. You sign the promissory note and the mortgage (or deed of trust), which create the debt and pledge the property as collateral. The loan agreement sets out the draw schedule, the inspection requirements, and what counts as default. The lender’s security interest is recorded in public records at this point, giving it priority over later claims.
Plan on paying closing costs now. These typically run 2% to 5% of the loan amount and include origination fees, title insurance, appraisal fees, and recording charges.2Fannie Mae. Closing Costs Calculator If you’re also buying the land, that cost is due at this closing as well. A construction escrow account is created to hold the loan funds and release them in draws as the build progresses.
Builder’s risk insurance has to be in place before closing — a standard homeowner’s policy won’t cover a home under construction. Builder’s risk covers the structure and materials for the duration of the build and is typically required to equal at least 100% of the completed home’s value.
What You Pay Between the Two Closings
During construction, you pay interest only on the money that has actually been drawn, not on the full loan amount. Early in the build, when only the foundation draw has been released, the monthly payment might be a few hundred dollars. As more draws go out, the interest charges grow.
Construction loan rates run higher than conventional mortgage rates, and most construction loans carry variable rates that adjust with the market during the build. Draw inspection fees are the other recurring cost: each draw triggers a third-party site inspection, generally $200 to $500 per visit, and a typical build runs five or six draws.
Funds release in stages tied to construction milestones — foundation, framing, mechanical systems, drywall, final finishes. The final draw is the smallest and doesn’t release until the local building authority issues a certificate of occupancy. That certificate is the trigger for whatever happens next on the loan.
The Second Closing — or No Second Closing
Which structure you picked at the first closing determines whether there’s a second one.
Single-Close Construction-to-Permanent
A construction-to-permanent loan uses one set of closing documents signed before building begins. Those documents already contain terms for both the construction phase and the permanent mortgage, so when the home is finished, the loan converts to a standard amortizing mortgage without a second full closing.
Fannie Mae allows this conversion to happen two ways: through a rider attached to the original mortgage instrument that makes the construction terms expire automatically, or through a separate modification agreement that formally converts the loan to permanent financing.3Fannie Mae. Conversion of Construction-to-Permanent Financing: Single-Closing Transactions Either way, the result is the same: interest-only construction payments shift to regular principal-and-interest payments, and no second set of closing costs is required. If construction finishes ahead of or behind schedule, the lender adjusts the amortization start date accordingly.
The single-close structure saves real money by avoiding a second round of origination fees, title insurance, and appraisal costs. The trade-off is that you lock in your permanent rate before construction starts, betting on where rates will be 12 to 18 months out. Some lenders offer extended rate locks of up to a year, though longer locks may carry a premium.
Two-Close Structure
The two-close model treats the construction loan and the permanent mortgage as separate transactions. After the home is finished, you pay off the construction loan with a brand-new permanent mortgage, which means a second underwriting, a second appraisal, and a second full closing.
That second closing carries a full set of costs, typically 2% to 5% of the new loan amount, on top of what you already paid at the first closing.2Fannie Mae. Closing Costs Calculator Start the permanent loan application 60 to 90 days before the anticipated completion date; construction timelines are imprecise, and you don’t want to be scrambling for financing after the last nail is driven.
The advantage is flexibility. You shop for the permanent mortgage at current market rates when the home is nearly done rather than locking a rate before the first shovel hits dirt. If rates have fallen during the build, you benefit. If they’ve risen, you absorb the cost, but you make that decision with current information.
When the Second Closing Slips
Construction delays are common enough to plan for. Most construction loans have a term of 12 to 18 months, and if the build isn’t finished in that window, you’ll need an extension from the lender. Extensions typically involve administrative fees and may come with a rate adjustment if market rates have moved since origination. Some lenders charge a flat fee of a few hundred dollars; others reprice the remaining term.
Cost overruns are the other risk. If a project runs past budget, the lender’s loan-to-cost ratio gets out of balance, and the lender may freeze draws until you add cash to cover the shortfall. Most lenders require a contingency reserve of 5% to 10% of total construction costs built into the original loan, with higher-risk or custom projects sometimes requiring 10% to 15%. Those reserves can only be tapped with lender approval and documentation. A guaranteed maximum price contract with your builder shifts overrun risk to the contractor and gives the lender more comfort with the project.
Every month the build runs long is another month of interest at the higher construction rate before the loan can close out or convert, which is reason enough to treat the original timeline as the floor, not the ceiling.