Construction Loan FAQs

Purchase: The loan is considered a purchase when you do not currently own the lot on which the home will be built. You are using the loan funds to purchase both the lot and to fund the construction of the property. The loan amount includes the sales price of the lot plus the cost to construct the home, minus your down payment.

Refinance: The loan is considered a refinance when you already own the lot where the home will be built. You are using the loan funds to pay off any existing liens on the lot and to finance the construction of the home. The loan amount includes any existing financing from the purchase of the lot plus the cost to construct the home.

Barndominiums and other unique properties may be eligible for construction financing, but it depends on the loan program guidelines (conventional or VA) and the appraiser's ability to find comparable sales in the area. If there are similar properties nearby that have sold recently, it strengthens your case. Each situation is evaluated individually, so contact me to discuss your specific project.

The builder and borrower agree on the build timeline before closing, and the lender conducts inspections before each draw to monitor progress. If there are issues or delays, they should be identified before the end of the build period so the lender can work with the builder to get back on schedule.

If the build does extend beyond the approved period, any expired credit documents (such as the appraisal or income verification) may need to be updated before the loan can be modified into permanent financing. In rare cases where updated documents show the borrower no longer qualifies, the borrower and lender will need to work together to find a solution.

Yes, you can build your home to any specifications you agree upon with your builder. The ability to finance the total cost depends on the appraisal and comparable sales in the area. If the total project cost exceeds the maximum loan-to-value ratio for your loan program, you will need to cover the difference at closing.

Generally, land with an existing dwelling is not eligible for a one-time close construction loan. To proceed, the borrower would typically need to parcel off part of the land to allow for the new build on a separate lot.

Yes, in many cases you can demolish an existing home and build new on the same land. On conventional loans, the existing home's foundation can sometimes be reused for the new build if it meets local code requirements for the proposed home. The demolition cost can be included in the project budget by the builder, and the ability to finance it depends on the appraised value and comparable sales in the area.

On VA construction loans, the rules are slightly different. The existing foundation typically cannot be reused, and the appraisal cannot reflect anything beyond the completion of the new foundation.

While not always required before submission, it is highly recommended that both the builder and the project receive lender approval as early as possible. Both approvals are required before the loan can receive a clear to close. Having these approvals in place before submission makes the loan process much smoother and helps set proper expectations with everyone involved in the transaction.

At loan closing, funds for the initial draw are collected with the title company and then forwarded to the lender. The lender holds all construction funds in escrow and disburses them to the builder in stages as work is completed. An inspection must be completed before every draw to confirm the scheduled work is done. The lender only pays draws for work that has been completed and verified by the inspector.

If you bring a down payment to closing, those funds are typically applied first toward the initial draw, subsequent draws, and closing costs. Once your funds are used, the remaining construction costs come from the loan balance.

Yes, your builder can provide a credit toward your closing costs. The credit is typically deducted from the initial draw paid to the builder. Keep in mind that builder credits must fall within the maximum interested party contribution limits for your specific loan program.

Owner-builders are generally allowed on conventional construction loans only, not VA. As an owner-builder, you must still go through the builder approval process with the lender. Expect stricter requirements compared to using a licensed general contractor:

• The budget will include significant contingencies to mitigate risk
• You will need to qualify at a higher payment amount
• A larger down payment and more equity will be required
• You must confirm it will be your primary residence with no intention to sell

Owner-builder projects carry more risk for lenders, so fewer lenders offer this option and the terms tend to be more conservative.

Yes, pre-started construction projects can sometimes be financed through a one-time close loan on conventional programs. You will need to provide invoices, permits, and supporting documents for the work already completed. The lender will also send an inspector to verify that all existing work is up to code before approving the remaining project.

For VA construction loans, the rules are stricter. Construction generally cannot start prior to the loan submission, so pre-started projects are typically not eligible for VA one-time close financing.

If you purchased materials for the home outside of the loan closing (for example, buying windows or fixtures and giving them to the builder to install), you generally cannot receive cash reimbursement from the loan proceeds. However, you can typically receive equity credit for those purchases. For example, if you bought $10,000 worth of windows for your new home, that amount would be counted as money you put toward the home, reducing your cash needed at closing.

On conventional one-time close loans, you typically make interest-only payments during the build period. You only pay interest on the amount that has been disbursed to the builder, not the full loan amount. This keeps your payments lower while construction is underway.

On VA one-time close loans, many lenders structure the loan so the builder covers the interest payments during construction, meaning you may have no monthly payments until the home is complete and the loan converts to permanent financing. The build period is then deducted from the 30-year loan term.

No, future rental income from the subject property cannot be used to qualify for a one-time close construction loan. Since you are responsible for making payments while the property is still under construction, and you will not be able to rent it out or collect rental income until after construction is complete and the loan converts, projected rental income is not an acceptable qualifying source.

If changes need to be made to the construction budget before closing, an updated budget and applicable construction contract addendum must be submitted to the lender. The lender will review the changes and update the loan file accordingly. Substantial changes after the initial budget review may result in additional fees, so it is best to finalize your plans and budget as completely as possible before submitting the loan.