A construction loan is a short-term loan that pays your builder in stages while the house is built, and you pay interest only on the money released so far. Most borrowers use a construction-to-permanent loan that becomes a regular mortgage when the house is finished. Conventional lenders typically want 20–25% down and a 680+ credit score; FHA, VA and USDA programs can go much lower.
Estimate your payments during and after the build:
How does a construction loan work?
A construction loan works in four steps:
- Approval on a budget. The lender approves the full project cost (land plus construction) from your plans, specifications and the builder’s line-item budget.
- Plans-and-specs appraisal. An appraiser values the finished home from the drawings.
- Draws. Funds are released in about 4 to 6 draws as the builder hits milestones such as foundation, framing, mechanicals and finishes. An inspector checks each stage first.
- Conversion. When the home is complete, the loan converts to (or is refinanced into) a permanent mortgage and principal payments begin.
During the build you pay interest only on the amount drawn, so payments start small and rise as the house goes up.
What are the types of construction loans?
| Loan type | How it works | Best for |
|---|---|---|
| Construction-to-permanent (one-time close) | One loan and one closing; converts to a mortgage | Most people building a home |
| Construction-only (two-time close) | Separate construction loan, then a new mortgage | Borrowers who want to shop for a mortgage rate later |
| FHA construction loan | Government-backed one-time close, 3.5% down | Lower credit scores or small down payments |
| VA construction loan | No down payment for eligible veterans | Veterans and service members |
| USDA construction loan | No down payment in eligible rural areas | Moderate incomes in rural areas |
| Owner-builder loan | You act as your own general contractor | Experienced builders; rare and 25–30% down |
How much down payment do you need for a construction loan?
You typically need 20% to 25% down for a conventional construction loan, according to The Lenders Network (June 2026). Government programs need less: 3.5% for FHA, and $0 for VA (eligible veterans) and USDA (eligible rural areas). If you already own the land, its equity can usually count toward the down payment.
What credit score do you need for a construction loan?
Most conventional construction lenders want a credit score of 680 or higher. FHA one-time close programs allow 580+ on paper, but many FHA construction lenders set their own floor at 620 to 640, and VA lenders typically start at 620 to 640.
Are construction loan rates higher than mortgage rates?
Yes. Construction-phase rates usually run about 1 to 2 percentage points above a standard 30-year fixed mortgage, because the lender is financing a house that does not exist yet. See construction loan rates for how rates are set.
How much does a construction loan cost?
Beyond interest, expect these costs (The Lenders Network, 2026):
| Cost | Typical amount |
|---|---|
| Closing costs, one-time close | $12,000–$18,000 |
| Closing costs, two-time close (combined) | $20,000–$30,000 |
| Draw inspection fees | $300–$500 per draw |
| Builder’s risk insurance | $1,500–$5,000 |
| Extension fee if the build runs late | 0.25%–0.5% of the loan per extension |
On a $400,000 loan at 8.5% drawn evenly over 12 months, interest during the build comes to roughly $18,000. Use the construction loan calculator for your numbers.
What do lenders require from your builder?
Lenders approve the builder as well as the borrower. They typically require a licensed general contractor with liability and workers’ compensation insurance, at least two years in business, references, and complete drawings with a line-item budget. Choosing a builder before a lender saves time. See how to choose a home builder.
How long does a construction loan last?
The construction phase usually lasts 6 to 12 months. Plan for delays: the average contractor-built home took about 12 months from permit to completion in 2024 (U.S. Census Bureau), and extensions cost extra.
What happens if construction goes over budget?
You pay the overrun yourself. Lenders hold a contingency of about 5–10% of the budget, but they will not increase the loan mid-build. Budget at least 10% for surprises.
Frequently asked questions
Can you get a construction loan with no money down?
Yes, through a VA construction loan if you are an eligible veteran, or a USDA construction loan in an eligible rural area.
Can I use a construction loan to buy land?
Usually yes. Most construction-to-permanent programs can include the land purchase in the same loan.
How do I get a construction loan?
Pick a builder, get plans and a budget, then apply with lenders that offer construction loans. See the step-by-step guide: how to get a construction loan.
Sources
- The Lenders Network: Construction loan requirements (updated June 2026) (down payments, credit scores, draw process, closing costs)
- NAHB: Single-family homes are built faster in 2024 (build times)
- NAHB: Cost of Constructing a Home in 2024
Loan terms change often and vary by lender. Nothing on this page is a loan offer or financial advice: confirm current rates, fees and eligibility with lenders before you apply.