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loan type: Home Construction Loans

for those building a house
Home construction lending is a little different than regular mortgage financing.

  • First, you will be given a construction line that will used to pay subcontractors and suppliers who perform work and provide supplies during the construction.

  • And then at the end of the construction project, you will use a residential mortgage to pay off the construction line.


More Information:

  1. loan advantages and disadvantages
  2. about home construction financing
  3. what's needed
  4. APPLY NOW | or call 1-877-777-1370
  5. use "shopping sheet" to compare lenders

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Loan Product Summary


  • Line of Credit
    for construction: they are looking to custom build their home by using a line of credit to pay contractors
  • Loan Options
    both loan options allow borrowers to select the type of mortgage loan — fixed, ARM, hybrid



  • Higher APR
    the APR is generally higher than other conforming loans
  • Limited Number of Lenders
    some lenders do not specialize in construction/perm loans


money saving tip

if you can afford the monthly payment on a 15-year loan, you will pay substantially less money than on the 30-year loan — plus your home will be paid off in half the time

if you can't afford the monthly payment on a 15-year loan, look at the 20-year loan

if you can afford the 20-year loan, consider prepaying some extra money each month

compare mortgage products among multiple lenders to get the best product and price

Another Money Saving Tip

view our program to help payoff your mortgage in 1/3rd of the time saving your thousands in interest

— plus imagine how to use your mortgage payoff bonus to plan for college, retirement, other

see how the mortgage payoff plan works

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About Home Construction Financing

Home construction lending is a little different than regular mortgage financing.

First, you will be given a construction line that will used to pay subcontractors and suppliers who perform work and provide supplies. And then at the end of the construction project, you will use a residential mortgage to pay off the construction line.

There are two parts to home construction financing

1: Construction Line:

  • Home Construction Line:

    you will ask the lender to open a home construction line that will be used to pay subcontractors and suppliers during the construction phase of the project. Generally, these players require payment within 30-60 days following work completion.

    Once each month, or after each stage of the home construction, your builder will submit a request for funds to pay for subcontracting work and supplies that was used during the construction phase.

    The lender will release funds after they have verified that the amount requested will be used for the construction phase that has been completed.

  • Let's run through a simple illustration:

    Say that your construction project is estimated to cost $100,000. The project will be completed in five phases.

    At the end of the first phase, you will request a release of funds ($20,000) from the bank to pay subcontractors and suppliers who completed work during this phase.

    Typically, the lender will send out an inspector to verify that the work has been completed. If passed, funds will be released to line the next day.

    The example was a simple illustration on how the construction line may work. The actual procedure may differ by lender.

  • Lenders normally have a fixed draw schedule

    Tied to each major phase of the construction. If you request more draws than allowed per project, you may be charged a nominal fee per draw.

    Don't underestimate your need for up-front cash. You will normally spend more money during the first construction phase than what you can draw up front.

    The construction line generally carries a higher interest rate than residential home mortgages.

2: Residential Mortgage:

You will need to apply for a residential mortgage to pay off the construction line

When you finish the construction project, you need to payoff the construction line. In most cases, this will be required prior to obtaining the construction line.

The residential mortgage is like any other single-family home mortgage loans. These include conventional and non-conventional loans, fixed, adjustable rates, etc.

3: Construction / Perm Loans:

  • Some lenders offer both the construction line and residential mortgage as one loan.

    The Construction/Perm loan is a combined loan made directly by the lender to the borrower. It functions as a construction line for financing the construction of the home, and then it serves as a permanent mortgage by paying off the construction line after you complete the construction project.

  • The Construction/Perm loan has some advantages, namely:

    the borrower can save money by paying for only one set of closing costs, attorney's fees, appraisal and taxes

    since the construction line is contingent upon approval of residential mortgage, obtaining a construction/perm loan allows the borrower to submit and provide documentation for one loan application and work through one lending institution. The borrower will work with one loan and one lender.

    because the loan is made directly to the homeowner, the borrower can take full tax advantage of the interest rate charges.

  • The Construction/Perm loan may also carry some disadvantages, namely:

    obtaining the best rate and terms. Some Construction/Perm loans carry higher than prevailing market rates.

    even though you may be working with one lender, usually the loan is managed by two separate departments. You may need to provide duplicate documentation.

    it is best to shop around to determine your best options.

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What's Needed

Startup Construction Budget:

A cash budget prior to obtaining your construction financing. Builders suggest anywhere from $5,000-10,000, depending on the size and scope of the construction.

This up-front expense is considered part of the overall project cost and is often part of the down payment or "reimbursed" as part of the construction loan.

Down Payment

Generally a minimum of 20% of more. The down payment may be cash, equitable securities, or the equity in an existing home or land purchase.

If you are using the equity in an existing home, make sure you obtained a true market value of your home and anticipated time to sell your home.

Planned Budget

Know your limits. It can become tempting to add additional items to the home that place the entire project out-of-budget. Some buyers have a budget cushion for upgrades and other changes.


Your submission of an application will require documentation of income and employment similar to a home resale mortgage application.

This will include verification of employment (W-2s, pay stubs, etc.), or if self-employed, documentation of income, savings and investment account statements, etc.

In addition, the lender will require construction specifications and cost breakdown for building your home. You will also need to provide the purchase contract or title to the construction site.

See our Home Building Center for Construction Specifications

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