A construction loan is a short-term financing instrument — typically 6 to 18 months in duration — used to fund the construction of a new residential property or a substantial renovation of an existing one. Unlike a traditional mortgage, which disburses the full loan amount at closing, a construction loan releases funds in periodic draws tied to verified construction milestones such as foundation completion, framing, rough-in work, and finishing. During the construction phase, borrowers typically pay interest only on the funds drawn — not the full loan amount — which helps manage carrying costs while the project is underway. At the completion of construction, the loan is either converted to a permanent mortgage through a construction-to-permanent product or paid off through a new mortgage obtained at that time.

The two primary construction loan structures are the construction-to-permanent loan and the standalone construction loan. A construction-to-permanent loan — sometimes called a "one-time close" — automatically converts to a standard mortgage at project completion, requiring only one closing and one set of closing costs. This is typically the most efficient and cost-effective structure for borrowers building a primary residence. A standalone construction loan, or "two-time close," is a short-term loan that must be paid off or refinanced into a permanent mortgage at completion — resulting in two separate closings and two sets of costs, but potentially greater flexibility in the permanent financing selected. Additionally, renovation construction loans such as the FHA 203(k) and Fannie Mae HomeStyle allow borrowers to finance both the purchase and renovation of an existing property in a single loan.

Construction loans are designed for borrowers who are building a custom home on land they own or are purchasing, buyers who cannot find an existing property that meets their needs in their target market, real estate investors pursuing ground-up development of rental properties, homeowners undertaking substantial renovation projects that exceed the scope of a standard home equity product, and developers financing residential construction at the project level. Construction lending requires a higher degree of financial documentation, builder qualification, and project planning than standard mortgage financing — making the guidance of an experienced advisor essential to a successful transaction.

Construction loans carry stricter qualification requirements than standard mortgages. Most lenders require a minimum credit score of 680–720, a down payment of 20–25% of the project's total cost (land plus construction budget), a detailed construction budget and timeline, a signed contract with a licensed and approved general contractor, and plans and permits for the proposed construction. Lenders will typically require an appraisal based on the projected completed value of the property — known as an "as-completed" appraisal — rather than current market value. Interest rates on construction loans are generally higher than permanent mortgage rates and are variable during the construction phase, reflecting the additional complexity and risk associated with the product.

The primary advantage of construction financing is the ability to build exactly what you want, where you want it — without the compromises inherent in purchasing an existing property. Construction-to-permanent loans minimize closing costs and simplify the financing process by combining both phases into a single transaction. Interest-only payments during construction reduce carrying costs while the property is being built. Key considerations include stricter qualification requirements, higher rates during the construction phase, the complexity of draw management and builder relationships, and the risk of cost overruns if the construction budget is not carefully managed. Our advisors work with borrowers from the pre-construction planning stage to ensure the financing structure is right-sized for the full scope of the project — not just the initial budget.