Construction Loans

What Is a Construction Loan?

A construction loan is a short-term financing option used to cover the cost of building a new home or completing a major renovation. Unlike a conventional mortgage, which is paid out in one lump sum, construction loan funds are released in stages, known as “draws,” as each phase of the build is completed. This structure protects both the borrower and the lender by tying funds directly to verified progress on the job site.

Most construction loans have a term of 12 to 18 months. During that time, you typically pay interest only on the funds that have been drawn, not on the full loan amount. Once construction is complete, the loan must either be paid off or converted into permanent financing.

Types of Construction Loans

There are several types of construction loan programs, and the right one depends on your goals, budget, and timeline.

• Construction-to-Permanent Loans: One of the most popular options, because it combines two loans into one. You close once, finance the construction phase, and the loan automatically converts into a traditional mortgage when the home is finished. This saves you from paying two sets of closing costs and simplifies the process.
• Stand-Alone Construction Loans: With this option, you secure a separate mortgage once building is complete. It offers more flexibility in choosing your permanent lender, but you have to qualify and pay closing costs twice.
• Owner-Builder Construction Loans: For borrowers who plan to act as their own general contractor. These loans are available, but they typically require proof of experience and licensing.
• Renovation Construction Loans: Designed for homeowners funding large-scale remodels rather than new builds, these loans roll renovation costs into a single financing package.

How Construction Loan Rates Work

Construction loan rates tend to be higher than rates on standard mortgages because these loans carry more risk for lenders. There is no finished property to serve as full collateral until the project is complete. Rates are often variable during the construction phase and tied to a benchmark index, though some lenders offer rate-lock options on construction-to-permanent products. Your rate depends on factors such as your credit score, down payment, project scope, and your builder’s experience.

Plan Your Budget Before You Build

Since you only pay interest during construction and then move to a full mortgage payment, it helps to understand how your payments will change. Learn what mortgage amortization is to see how each payment is split between principal and interest once your loan converts to permanent financing. You can also check the payment on a $400K mortgage for a real example that helps you plan a realistic budget.

Construction Loan Requirements

Qualifying for a construction loan generally involves a more rigorous process than a typical home purchase loan. Lenders will usually want:

• A detailed construction plan and timeline
• A signed contract with a licensed, insured builder
• Building plans and specifications
• An appraisal based on the future completed value of the home
• A larger down payment, often between 20% and 25%
• Strong credit and a stable income history

Because construction loans involve more moving parts, working with a lender who has direct experience in construction financing can make a significant difference in how smoothly your project moves forward.

The Draw Process Explained

Once your loan closes, funds aren’t handed over all at once. Instead, your lender will schedule periodic inspections tied to project milestones — such as foundation work, framing, roofing, and finishing — and release a “draw” after each stage is verified. This keeps your budget accountable and ensures your builder is paid as work is actually completed.

Benefits of Choosing the Right Construction Loan

The right construction financing does more than fund your project — it can also protect your long-term financial position. Construction-to-permanent loans, for example, help borrowers avoid the uncertainty of re-qualifying for a mortgage after the build, while also locking in favorable long-term terms early. Working with an experienced lender also means fewer surprises, clearer communication with your builder, and a smoother draw schedule from groundbreaking to final walkthrough.

Is a Construction Loan Right for You?

If you’re planning to build a custom home, complete a major renovation, or take on an owner-builder project, a construction loan may be the ideal financing solution. The key is partnering with a lender who understands the nuances of construction financing and can guide you through each phase — from initial approval to your final draw.

Get Expert Guidance on Your Construction Loan

Ready to explore your construction loan options? Reach out today for personalized guidance tailored to your building project.

Lee Boone 📞 (207) 491-0012 ✉️ lboone@acadialending.com

Our mortgage solutions include Conventional Loans, VA Loans, Construction Loans, First Time Home Buyer Programs, Hard Money Loans, Jumbo Loans, DSCR Loans, and FHA Loans, providing a range of financing options designed to support homebuyers, investors, and property owners with different lending needs.