ABCs of Construction Loans

Dated: April 17 2021

Views: 52

ABCs of Construction Loans

Building a home might sound like something reserved for the rich and famous, but the truth is, it might be easier than you think to get a construction loan.

What is a construction loan?

Construction loans are short-term, higher-interest-rate mortgages that cover the cost of building or renovating a home. The buyer qualifies for the final mortgage and the lender pays the contractor for cost on a pre-approved schedule. Once the construction is complete, the loan is converted into a traditional home loan.

Type of Construction Loans

  • Construction to Permanent – Converts to a permanent loan with the interest rate locked in at closing.

  • Construction Only – Must be paid off when construction is complete, so the borrower will then need to get new financing.

  • Renovation Construction Loan – Cost of renovations are included in the original mortgage based on the value of the home after the repairs or upgrades. Best used for buying a fixer-upper property.

    What’s included in the loan?

    The construction loan generally pays for:

    • Land

    • Labor and materials

    • Plans, permits, and fees

    • Contingency reserves to allow for changes and delays

      Can I qualify?

      All mortgages have minimum qualifications for approval. Construction loans are riskier for the lender because there is no existing collateral in the form of the home. Along with typical requirements for debt-to-income limits and FICO score minimums, the lender will often ask for a higher down payment (30% is typical) and a plan to pay off the loan at the end of the project (proof of cash or loan).


Building from scratch offers many benefits to the homeowner. The blank slate is appealing. By taking advantage of a construction loan, even the average consumer can build their dream home

Blog author image

Sandy Hunt

Sandra Hunt, REALTOR® at Exp Realty, LLC, is one of the leading residential real estate agents in north Texas. She has extensive client base featuring those who seek luxury lifestyle, country living....

Latest Blog Posts

Rising Home Prices Impact Your Net Worth?

Could Rising Home Prices Impact Your Net Worth?  Learn how to determine your current net worth and how an investment in real estate can help improve your bottom line. Among its many

Read More

It Pays to Sell with ME!

Some HighlightsToday, it’s more important than ever to have an expert you trust to guide you as you sell your house.From your safety throughout the process to the complexity of negotiating the

Read More

Pre-Approval to Buy Your Dream Home

What is a pre-approval letter and how do you get one?The pre-approval letter from your lender tells you the maximum amount you are qualified to borrow. Getting a pre-approval letter is not a loan

Read More


“Empty Nesters!” ?️? Definition: A parent whose children have grown and moved away from home.If you’ve recently found yourself in this stage of life, you may be thinking about

Read More