The Types of Construction Loans

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There are several types of construction loans to choose from, each designed for different situations:

1. Single Close (One-Time Close) Construction Loan

This is the most common and most convenient choice. You essentially get two loans – the construction loan and the permanent mortgage – but you do it all in one closing. One approval, one interest rate, one down payment, and one set of closing costs. Upon completion of the construction, the loan automatically converts to a permanent mortgage with no second closing required.

You lock in an interest rate before you close, giving you predictable payments when the house is done. Depending on the lender, you may have the option to modify your rate down if the market improves during the build period.

Single close construction loans are available on 15- and 30-year fixed rate options as well as adjustable rate mortgages. They are eligible for primary residences, second homes, and investment properties. A minimum credit score of 700 is required. Maximum LTV is 95% for primary residences (as low as 5% down), 90% for second homes, and 85% for investment property purchases (75% for rate/term refinance or 2-4 unit properties). During the build period (typically up to 11 months with a 1-month modification period), you make interest-only payments on the amount disbursed, keeping your costs manageable while your home is being built.

The single close option is the most popular because you save on closing costs, eliminate the risk of rate changes between construction and permanent financing, and have a predictable payment once construction is complete.

2. Two-Close Construction Loan

This option is more complicated but allows a little more freedom when building the home. You first apply for the construction loan based on the building plans and the funds you need. You go through the approval, closing, and funding process for construction funds only.

As you near completion, you’ll need to convert the construction loan to a permanent loan. This requires approval, closing, and funding a second time. The proceeds from the permanent loan pay off the construction loan.

This is ideal for the buyer that doesn’t have concrete house plans in place, may want changes throughout, and/or wants to wait for the perfect permanent mortgage.

3. Renovation Construction Loan

This loan works for buyers (or homeowners) looking at a fixer-upper. If you’re buying the home, chances are it won’t pass an appraisal as-is, but you can wrap the renovation costs into the loan, basing the loan amount on the after-repaired home value.

If you already own the home, you can refinance the home with the renovation costs included. Just like the fixer-upper, lenders base your LTV on the after-repaired home value based on the renovations you propose.

4. Builder Construction vs. Owner-Builder Construction

When building a home, there are two main approaches: using a licensed general contractor (builder construction) or acting as your own general contractor (owner-builder construction). Each has different implications for your construction loan.

Builder Construction – This is the more traditional route and the easier path to financing. A licensed general contractor manages the entire build process, from hiring subcontractors and ordering materials to scheduling inspections and managing the timeline. Lenders prefer this arrangement because a professional builder carries insurance, has an established track record, and is accountable for completing the project on time and on budget. Most construction loan programs, including single close options, are designed with this approach in mind.

Owner-Builder Construction – In this scenario, you act as your own general contractor. You hire the subcontractors, order materials, manage the budget, and oversee the timeline yourself. While this can save money on general contractor fees, it is significantly harder to finance. Most lenders view owner-builder projects as higher risk because the borrower may lack construction management experience. If you plan to go the owner-builder route, expect stricter requirements including higher down payments (often 25\xe2\x80\x9330 percent or more), a minimum credit score of 700, and a requirement to demonstrate construction knowledge or experience. Fewer lenders offer owner-builder programs, so your options may be more limited.

5. VA One-Time Close Construction Loans

Veterans and active-duty service members can use their VA benefits to build a home from the ground up with a VA one-time close construction loan. This combines the simplicity of the single close process with the powerful benefits of VA financing.

VA construction loans are available as 30-year fixed rate loans (both standard and jumbo) for primary residences only, including 1-4 unit properties. The minimum credit score is 580, and up to 100% financing is available – meaning no down payment is required for either purchases or refinances. The maximum construction period is 11 months, with interest-only payments during the build.

Here is what makes VA construction loans stand out compared to conventional construction loans:

• 100% LTV – no down payment required on purchases or refinances
• No monthly mortgage insurance
• Minimum credit score of 580 (compared to 700 for conventional)
• One closing, one approval, one interest rate
• Some lenders structure the loan so the builder covers interest during construction, meaning no monthly payments until the home is complete
• Maximum 11-month construction period
• For purchases, the maximum base loan amount is the conforming loan limit for your county
• Jumbo VA construction loans are available for refinances, starting at $1 over the conforming loan limit

VA Construction Loan: Purchase vs. Refinance

One question I get often is the difference between a VA construction purchase and a VA construction refinance. The distinction comes down to whether or not you already own the land where the home will be built.

Purchase – If you do not currently own the lot, the transaction is structured as a purchase. The VA construction loan covers the cost of buying the land and building the home in a single transaction. Your loan amount includes the purchase price of the lot plus the full construction cost. Because it is a purchase, the maximum base loan amount is capped at the conforming loan limit for your county.

Refinance – If you already own the lot (or have an existing mortgage on it), the transaction is structured as a cash-out refinance. The loan pays off any existing balance on the lot and provides the funds to build the home. Since you already own the property, this is treated as a refinance even though you are building a brand new home. VA construction refinances are available in both standard and jumbo loan amounts, with jumbo starting at just over the conforming loan limit.

In both cases, VA construction loans offer 100% financing with no down payment, no mortgage insurance, and the same one-time close convenience. The VA funding fee applies to both purchase and refinance transactions and can be financed into the loan amount. You will also need a valid Certificate of Eligibility, and the completed home must meet VA Minimum Property Requirements.

Choosing the Right Builder

There’s one unique step in the construction loan process in Colorado – choosing the builder. While I know you want the right builder based on your specs, the lender has a say in the builder too.

Because the builder’s reputation and ability to complete the project as promised plays a large role in the construction process and whether you can pay the loan back, lenders have a vested interest in the builder.

Before you start the loan process, I recommend shopping for a builder. You should have at least 3 estimates from different builders. This gives you a chance to compare your options and see what each builder offers.

Remember, the lender has the final say whether a builder is satisfactory or not. As you vet builders, do the following:

• Ask for references
• Assess other work the builder has done
• Ensure plans meet all local requirements
• Proof insurance
• Proof of license

The lender will need all of this, plus final blueprints. Along with the blueprints, lenders need a detailed budget breakdown from the builder. What materials do they need and what are the costs? What is the cost of labor?

Finally, they need an executed contract that shows the detailed timeline for each phase as well as finalized start and completion dates.

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