Land and Equity
The lot, acquisition history, current value, liens and borrower equity help establish the starting position.
Finance the plan from land to completion
Construction Financing
Construction financing may help fund an eligible new home or investment project through a structured series of advances as work is completed. The complete review connects the borrower, land, plans, builder, budget, timeline and permanent financing strategy.
29 years of mortgage experienceProject-focused reviewComplete financing comparisons
The short answer
How Does Construction Financing Work?
A construction loan generally provides funds in stages rather than delivering the entire construction amount at closing. After eligible work is completed and verified, an approved draw can reimburse or pay for that phase of the project.
The lender evaluates the proposed improvements, total project cost and expected completed value. The structure must also address how the construction balance will be repaid or converted into longer-term financing when the work is complete.
Approval of the loan is not approval of every future cost.Changes to plans, budget, builder, timeline or property may require review and could affect available funds or completion.
Build the complete project file
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Six Parts of a Construction Review
The financing must remain workable from closing through completion. These connected parts help define the structure.
Plans and Permits
Plans, specifications, engineering, permits and property approvals must support the proposed project.
Builder Review
Experience, licensing, insurance, references and financial capacity may be reviewed under program requirements.
Budget and Contract
The construction agreement and itemized budget must account for labor, materials, fees and contingencies.
Completed Value
An appraisal may evaluate the land and proposed improvements using the plans and specifications.
Completion Strategy
The loan must address the construction period, final inspection and repayment or permanent financing plan.
Choose the complete structure
One-Time and Two-Time Closings Work Differently
Availability varies. Compare the documentation, rate structure, closing costs and long-term financing plan before proceeding.
Construction and permanent phases connected
Single-Close Construction-to-Permanent
- Construction and permanent financing are arranged together
- One initial closing may reduce duplicate closing steps
- Permanent terms are established under the selected program
- Changes during construction can still require approval
- Conversion occurs after completion requirements are satisfied
Separate construction and permanent loans
Two-Close Construction Financing
- A short-term loan funds the construction phase
- Permanent financing is completed in a later transaction
- The borrower may need to qualify again
- Future rates, costs and loan availability may change
- The exit plan should allow for timing and market risk
Control the project before closing
A Complete Budget Needs More Than Materials and Labor
- Land or site acquisition
- Plans, engineering and permits
- Site work and utility connections
- Labor and construction materials
- Builder and general-contractor costs
- Interest and applicable loan costs
- Contingency for eligible overruns
- Completion and inspection requirements
A simplified project view
Estimate the Total Project Cost
Land + Approved Construction Costs + Eligible Soft Costs
= estimated total project cost
= estimated total project cost
This is a planning illustration only. The lender determines eligible costs, required equity and available loan amount.
Preserve room for change
Contingency Planning Protects the Completion Strategy
Material prices, labor availability, site conditions and permitting can affect both cost and timing. A complete plan considers what happens if the project does not follow the original schedule.
- Confirm which overruns can be financed and which require cash.
- Review change-order approval before authorizing new work.
- Maintain appropriate liquidity beyond the minimum required funds.
- Understand extension, inspection and draw-related costs.
- Keep the builder, lender and project team informed of material changes.
Understand how funds are released
From Approved Budget to Construction Draw
Draw procedures vary, but funds are generally released after the applicable work and supporting conditions are verified.
Request
The builder or borrower submits a draw request for eligible completed work and documented costs.
Inspect
An inspection may confirm the percentage of completion and that funded work is in place.
Review
The lender reviews the request, remaining budget, lien documentation and applicable program conditions.
Release
Approved funds are released according to the loan’s draw procedure and disbursement instructions.
Avoid common project assumptions
What Construction Financing Does Not Automatically Cover
Unapproved Changes
Work outside the approved plans or budget may require review and may not be eligible for loan funds.
Every Cost Overrun
The borrower may be responsible for increases beyond the approved loan and available contingency.
Unlimited Time
The construction period and any extension are governed by the loan and program requirements.
Guaranteed Conversion
Completion, documentation and other conditions must be satisfied before permanent financing or payoff.
The construction financing process
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Step 2
Step 3
Step 4
From Initial Plans to Final Completion
The exact process varies, but a prepared construction transaction generally follows these connected stages.
Define the Project
Identify the land, property use, plans, builder, budget, equity and expected construction timeline.
Review the Complete File
Evaluate borrower qualifications, project documents, builder information and proposed completed value.
Close and Build
Complete closing conditions, begin approved work and request draws as construction progresses.
Complete and Convert
Finish inspections and documentation, then convert, refinance or repay according to the approved structure.
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Ready to Review Construction Financing?
Start with a conversation about the land, plans, builder, budget, available equity and completion strategy.