How Does Financing a New Home Work?
Construction lending explained: the loan types, how money gets released, and what converts to a mortgage.
Most of our clients use a construction-to-permanent loan, which funds the build and then converts into a traditional mortgage when the home is finished. Construction lending works differently from buying an existing house, so it's worth understanding before you talk to a lender.
The three loan types you'll hear about
- Construction-to-permanent. One loan, one closing. It covers construction, then rolls into your mortgage at completion. See the full explanation.
- Construction-only. Short-term financing for the build, paid off by a separate mortgage you arrange afterward. Two closings, two sets of costs. See construction loan vs mortgage.
- Lot loan. Finances the land purchase until construction starts. See lot loans.
The part that surprises people: draws
A construction loan doesn't hand you a lump sum. Funds are released in stages, called draws, as work is completed and inspected. During construction you typically pay interest only on what has been drawn so far. See how draws work.
The six steps
- Get pre-approved
- Choose your loan type
- Finalize your home plan and price
- Loan approval and closing
- Funds distributed through construction draws
- Conversion to permanent financing, if applicable
Who we work with
We partner with lenders who specialize in construction loans, so you're not explaining draw schedules to someone who normally writes purchase mortgages. We don't originate loans ourselves and we don't take a cut of yours.
Before you call a lender
Know roughly what you want to build, whether you own land, and what your credit looks like. See credit score requirements, down payment expectations and the document checklist.
More detail on our financing page.