Construction Loans Explained: Financing to Build Instead of Buy

A construction loan finances building a home from the ground up, releasing funds in stages as the build progresses, rather than as one lump sum at closing like a traditional mortgage. The two main structures, one-time close and two-time close, work differently enough that picking the right one matters just as much as picking the right builder.

How a construction loan actually works

Instead of handing you the full loan amount upfront, a construction loan pays your builder in draws, tied to inspected milestones as the home gets built, foundation, framing, roofing, and so on. During construction, you typically pay interest-only on whatever has actually been drawn so far, keeping payments manageable while the home isn't livable yet.

One-time close vs. two-time close, the real difference

This is the comparison that actually matters once you decide to build, and it's worth understanding before you talk to a builder, not after.

One-time close combines construction and permanent financing into a single loan and a single closing, before the first shovel goes in the ground. You apply once, get underwritten once, and the loan automatically converts into a standard mortgage once the home is finished.

• You lock your rate early, before construction even starts, protecting you from market movement during the build

• One set of closing costs instead of two

• Lower risk of getting denied after the home is already built

• Less flexibility to switch lenders or renegotiate terms partway through

Two-time close uses two separate loans. A construction-only loan funds the build, typically over 6 to 12 months, then a second closing pays that loan off and starts a brand new permanent mortgage.

• You can shop for the best permanent rate after the home is finished, instead of locking in before you know what rates will look like a year out

• You can potentially refinance based on the home's updated appraised value once it's built

• You pay closing costs twice, once for construction and again for the permanent loan

• You have to fully requalify at the second closing, based on your credit, income, and job status at that point, not when you started

What lenders actually want to see

• A licensed, vetted builder with a detailed contract and a real cost breakdown, not a handshake estimate

• Land you already own, or that's being purchased as part of the same transaction

• A realistic construction timeline and budget, since overruns are common and lenders want a cushion built in before they'll approve the loan

Why one-time close is the default recommendation for most buyers

Paying closing costs twice and requalifying mid-project are real risks, not hypothetical ones. A job change, a dip in credit, or a shift in the market between your construction loan and your second closing can derail a two-time close deal after months of work are already underway. A one-time close loan locks your rate and your approval before the build even starts, which is exactly why it's the more common choice for buyers who don't have a specific reason to want the flexibility two-time close offers.

Down payment and what to budget for

Construction loans commonly require more down than a standard purchase loan, often in the 10 to 20% range depending on the lender and program, though VA construction financing can bring that number down meaningfully for eligible veterans. Build in a real contingency reserve too. Cost overruns are one of the most common reasons a construction project runs into financing trouble partway through.

FAQ

Do I need 20% down for a construction loan?

Often more than a standard purchase loan, commonly in the 10 to 20% range depending on the lender and program, sometimes lower with VA construction financing for eligible veterans.

What happens if construction costs run over budget?

This is exactly why lenders build in a contingency reserve upfront, and why working with an experienced, vetted builder matters as much as choosing the right loan.

Is one-time close always cheaper than two-time close?

Usually yes, since you only pay one round of closing costs instead of two. Two-time close can still make sense if you specifically want the flexibility to shop for a different permanent lender once the home is finished.

Can a construction loan convert automatically into my regular mortgage?

With a one-time close loan, yes, that conversion is built into the loan from the start. A two-time close loan requires a separate second closing and a full requalification instead.

Thinking about building instead of buying? Let's talk through whether a one-time close or two-time close fits your project. Book a call. Expect to close one week early.