Frequently Asked Questions

Common questions about construction loans and financing

Common Construction Loan Questions

How do construction loans work?

Construction loans provide funds in stages as your project progresses. You pay interest only on the amount drawn during construction, then the loan converts to a permanent mortgage when building is complete.

What's the typical down payment for a construction loan?

Most lenders require 20-30% down payment for construction loans. Some lenders may require as much as 30-40% depending on your credit score and the project complexity.

How long does the construction loan phase last?

Construction loans typically have terms of 6-18 months, with 12 months being most common. The exact term depends on your project timeline and lender requirements.

What happens if construction goes over budget?

If costs exceed your budget, you'll need to pay the difference out of pocket or seek additional financing. This is why it's crucial to budget for 10-20% contingency costs.

Can I act as my own general contractor?

Some lenders allow owner-builders, but requirements are stricter. You'll need construction experience, detailed plans, and often higher down payments. Many lenders prefer licensed contractors.

What interest rate can I expect?

Construction loan rates are typically 0.5-1% higher than conventional mortgage rates. Rates vary by lender, credit score, and loan-to-value ratio.

How often are construction draws released?

Draws are typically released at major construction milestones: foundation completion, framing, roof, electrical/plumbing rough-in, drywall, and final completion.

What if my contractor abandons the project?

This is a serious situation. Contact your lender immediately. You may need to hire a new contractor and potentially seek additional financing to complete the project.

Can I lock in my interest rate?

Many construction-to-permanent loans offer rate locks for the entire construction period plus the initial permanent loan term, protecting you from rate increases.

What inspections are required?

Lenders typically require inspections at each draw stage to verify work completion and quality. Local building inspectors also conduct required safety and code inspections.

Getting Started with Construction Loans

Construction loans require careful planning and preparation. Before applying, ensure you have: detailed construction plans, a qualified contractor, a realistic budget with contingency funds, and a clear understanding of the draw schedule and timeline.

Key Preparation Steps

  • • Review your credit score and financial situation
  • • Research and interview potential contractors
  • • Develop detailed construction plans and specifications
  • • Create a comprehensive budget with 15-20% contingency
  • • Compare lenders and their construction loan products

💡 Need More Information?

Construction loans can be complex, and every situation is unique. Use our comprehensive tools and guides to better understand your financing options and get accurate estimates.

Use Calculator →Read Guide →Compare Rates →Contact Expert →

Additional Resources

Government and Industry Resources

For additional information about construction financing, regulations, and consumer protection, consider these authoritative resources: