Construction Financing for Custom Homes

How construction loans work for custom homes

A construction loan funds a custom build through a draw schedule tied to completed work, with interest paid only on the drawn balance during construction. Most buyers use a construction-to-permanent loan that converts to a traditional mortgage at certificate of occupancy. Expect lender requirements of 20–30% equity, builder approval, fixed-price or GMP contract, full plans, line-item budget, and an interest reserve.

Loan structure

Construction-to-permanent. Single close, converts to a mortgage at C/O. Most common.
Two-close. Separate construction and permanent loans; useful when you expect to refinance.
Lot loan. Bridges land purchase before construction; typically rolled into the construction loan at close.
Owner-builder. Allowed by some regional lenders for buyers with construction expertise; uncommon and tightly underwritten.

Underwriting requirements

Borrower: credit score (typically 700+), debt-to-income ratio, liquidity, and reserves.
Builder: lender-approved, with current financials, references, and license verification.
Project: full plans, specifications, line-item budget, fixed-price or GMP contract, and contingency line (typically 5–10%).
Appraisal: based on the completed home as proposed in the plans, not the lot.

Where BuilderConcierge AI fits

We don't originate loans. We help you reach the lender meeting with a complete spec, a vetted builder, and a realistic budget — the package that determines whether the underwriter approves you. See how to build a custom home.

Common questions

Construction-to-permanent or two-close?+

Construction-to-permanent (single-close) is cheaper and simpler — one closing, one set of fees, one rate lock. Two-close lets you shop the permanent loan separately but doubles closing costs and re-exposes you to rate risk.

How much equity do I need?+

Most construction lenders require 20% to 30% of total project cost as borrower equity. Lot equity counts; cash, brokerage assets, and sale-of-current-home proceeds also count. The appraised value, not the contract price, is what the bank lends against.

What's an interest reserve?+

A pool of funds set aside at closing to cover interest payments during construction, so the borrower isn't carrying interest plus rent or an existing mortgage. Interest is paid from the reserve as draws occur.