How to Finance Building a Home - Know Your Options

Building a new home requires more capital upfront than buying an existing property—and traditional mortgage financing doesn't work the same way. While a standard home purchase loan releases funds in one lump sum at closing, construction financing disburses money in stages as your home takes shape. Understanding your financing options before you break ground helps you secure the right loan structure, avoid cash flow problems, and keep your project on budget.

Most new home builders use construction loans that convert to permanent mortgages, though other options exist depending on your financial situation and how involved you want to be in the building process. Each financing method has distinct requirements, costs, and timelines. Choosing the wrong one can lead to higher interest rates, unexpected fees, or funding gaps that stall construction.

How financing tends to differ between building vs. buying

When you buy an existing home, the financing process is straightforward: you apply for a mortgage, get approved based on the home's appraised value, and receive all funds at closing in one lump sum. The seller gets paid, you get the keys, and you start making monthly principal and interest payments immediately.

Building a new home works differently in almost every way.

Staged funding instead of lump sum: Construction lenders don't hand over hundreds of thousands of dollars upfront. Instead, they release funds in draws—typically 4–6 disbursements tied to specific construction milestones like foundation completion, framing, rough-in work, and final finishes. After each phase, your contractor requests payment, the lender sends an inspector to verify the work is complete, and then funds are released. This protects the lender (ensuring money goes toward actual construction progress) but creates a more complex payment process than simply writing one check at closing.

Interest-only payments during construction: For the 6–12 months your home is being built, you typically pay only interest on the amount disbursed so far, not principal and interest on the full loan amount. If your loan is for $400,000 but only $150,000 has been released, you're paying interest on $150,000. Your payment amount changes each month as more funds are disbursed. Once construction finishes and the loan converts to a permanent mortgage, you begin making standard principal and interest payments.

Higher qualification standards: Lenders view construction loans as riskier than traditional mortgages. You're borrowing against something that doesn't exist yet, and construction projects can face delays, cost overruns, or quality issues. As a result, construction loans typically require larger down payments (20–25% vs. 3–20% for purchase loans), higher credit scores (680–720 vs. 620–680), and more extensive documentation including detailed construction plans, contractor credentials, and project timelines.

Two appraisals instead of one: Purchase loans require one appraisal of the existing home. Construction loans require two: a land appraisal before loan approval (to establish collateral value) and a completed home appraisal after construction (to confirm the finished home's value matches or exceeds the loan amount). You'll pay $500–$1,000 for each appraisal.

Longer approval timelines: Getting approved for a construction loan takes longer than a purchase mortgage. Lenders review architectural plans, evaluate your contractor's qualifications and experience, analyze construction budgets line by line, and assess project feasibility. Where a purchase mortgage might be approved in 2–3 weeks, construction loan approval often takes 4–8 weeks.

No existing home to leverage immediately: When you buy a home, you can move in right away and start building equity. When you build, you're making loan payments (interest during construction, then full payments after) on a home you can't occupy for 6–12+ months. If you're simultaneously paying rent or a mortgage on your current home, this dual housing cost period strains cash flow in ways a simple home purchase doesn't.

More documentation and oversight: Construction lenders stay involved throughout your project. They review draw requests, send inspectors to verify work quality, and approve or deny fund releases at each stage. Purchase lenders essentially disappear after closing—they collect your monthly payment but don't monitor your property. Construction lending is an active, ongoing relationship until your certificate of occupancy is issued.

Understanding these differences helps you prepare for a more complex, hands-on financing process than a traditional home purchase requires.

Renovate now, pay later

Achieve the space you're looking for today, while financing it over time with our trusted partner.*

*Not available in NYC

Learn More

What lenders want to see when assessing

Construction lenders evaluate both standard mortgage qualification criteria and construction-specific factors before approving your loan. Having these materials ready at the time you apply for financing can ultimately save you drawn out headaches.

Standard borrower qualifications

On the borrower side, lenders look for the same fundamentals as any mortgage: credit scores of 680–720+ (though FHA and VA accept lower), debt-to-income ratios under 43–50%, at least two years of stable employment or self-employment income, down payments of 20–25% for conventional loans (less for FHA/VA), and cash reserves of 6–12 months of mortgage payments beyond your down payment and closing costs. These requirements are typically stricter for construction loans than purchase mortgages due to the additional risk lenders assume when financing a home that doesn't yet exist.

Construction-specific requirements

Detailed, professional plans: Lenders need complete architectural drawings with floor plans, elevations, material specifications, and cost breakdowns. Hand-drawn sketches or vague plans will be rejected. Your plans must be detailed enough that any qualified contractor could build from them and that the lender can verify projected costs are realistic.

Licensed, experienced contractor: Most lenders require your builder to be licensed (in states that require licensing), insured with general liability and workers' compensation coverage, and experienced in projects similar to yours. Many lenders maintain approved contractor lists or require contractors to submit extensive documentation proving their qualifications. Some lenders won't work with contractors who have been in business less than 3–5 years or who have limited experience with the type of home you're building.

Realistic construction budget: Your cost estimate must account for all expenses: site prep, foundation, framing, materials, labor, permits, utility connections, landscaping, and a contingency fund. Lenders compare your budget against local building costs and will question numbers that seem too low. Underestimating costs signals either inexperience or an attempt to borrow more than the project justifies.

Feasible timeline: Construction loans typically require completion within 12 months. Projects expected to take longer may not qualify. Your timeline must align with local building seasons and your contractor's capacity. A timeline showing foundation work starting in January in Minnesota, for example, raises immediate concerns.

Clear contractor payment schedule: Lenders want to see a draw schedule showing when payments will be requested and for what work. Typical schedules include 4–6 draws: after foundation completion (20–25% of total), after framing and roof (25–30%), after rough-in and insulation (20–25%), after drywall and interior finishes (20–25%), and final payment after completion (5–10%).

Builder's track record: Lenders review your contractor's history of completing projects on time and within budget. Contractors with multiple incomplete projects, lawsuits from homeowners, or patterns of cost overruns will be rejected or require additional scrutiny.

Permits and approvals: You'll need proof that your project can legally proceed—either permits already issued or evidence that permits have been applied for and approval is expected. Projects in areas with complex zoning or environmental restrictions require extra documentation showing you've addressed these requirements.

Adequate collateral: The land plus the completed home's projected value must exceed your loan amount. Most lenders limit construction loans to 80–85% of the completed home's appraised value. If your land is worth $100,000 and your completed home will be worth $400,000 (total $500,000), lenders will typically loan up to $400,000–$425,000, requiring you to cover the difference.

Popular financing options for building a home

Construction-to-permanent loans

Construction-to-permanent loans combine construction financing and a permanent mortgage into one loan with a single closing. You close once, lock your rate, and the loan automatically converts from construction to mortgage when building is complete.

How they work: During the 6–12 month construction phase, you pay interest only on disbursed funds. The lender releases money in draws as work progresses. Once you receive a certificate of occupancy, the loan converts to a traditional mortgage and you begin principal and interest payments.

Requirements: 20–25% down payment, 680–720 credit score minimum, detailed construction plans, licensed contractor, completion within 12 months, debt-to-income under 43–50%.

Costs: Interest-only payments during construction (rate typically 0.5–1.5 points above conventional mortgages), one set of closing costs (2–5% of loan amount), two appraisals ($500–$1,000 each), draw inspection fees ($100–$300 per inspection, typically 4–6 inspections).

Pros: Single closing saves $3,000–$8,000 in duplicate fees, rate locked at start protects against increases, simpler process with one application, automatic conversion to mortgage without requalifying.

Cons: Stricter qualification requirements, less flexibility for mid-construction changes, higher rates than traditional mortgages during construction phase.

Best for: Homeowners building with licensed contractors who want simplicity and rate protection, especially if rates are expected to rise.

Construction-only loans

Construction-only loans provide short-term financing just for building, then require a separate permanent mortgage at completion—resulting in two closings and two sets of fees.

How they work: You secure a 6–12 month construction loan and make interest-only payments during building. When construction finishes, you apply for a traditional mortgage to pay off the construction loan. This means two full application processes and two closings.

Requirements: 20–30% down, 680–720 credit score, detailed plans and licensed contractor, proof you'll qualify for permanent financing when construction ends.

Costs: Interest during construction (1–2 points above prime rate), two sets of closing costs (adding $6,000–$15,000 vs. single-close), two appraisals, draw inspections.

Pros: Can secure lower permanent mortgage rate if rates drop during construction, more lender flexibility, easier to refinance if financial situation improves during build.

Cons: Double the closing costs, rate risk if rates rise, must requalify for permanent mortgage (could fail if finances worsen), more complex coordination.

Best for: Borrowers expecting interest rates to decline during construction, those planning to improve credit or income during the build, anyone wanting maximum permanent lender flexibility.

Owner-builder construction loans

Owner-builder loans are for homeowners acting as their own general contractor, managing all subcontractors and construction directly.

How they work: Funds are released in draws directly to you instead of to a general contractor. You hire and pay all subcontractors and manage the entire construction process yourself.

Requirements: Demonstrated construction experience (often requiring previous home building), 25–35% down, 700–740 minimum credit score, comprehensive project plan showing construction knowledge, licensed subcontractors for all trades, 6–12 months mortgage payments in reserve.

Costs: Interest rates 1–2 points higher than traditional construction loans, larger down payments, draw inspections (possibly more frequent), opportunity cost of your full-time labor for 6–12 months.

Pros: Potential savings of $40,000–$100,000 by eliminating general contractor fees (typically 10–20% of costs), complete control over decisions and quality, direct subcontractor relationships.

Cons: Extremely difficult to qualify (few lenders offer these), enormous time commitment (40–60+ hours/week), high risk without professional experience, very limited lender options, complete liability for safety and code compliance.

Best for: Experienced builders or construction professionals with time, knowledge, and project management skills. Not recommended for first-time builders regardless of potential savings.

Home equity loans and HELOCs

If you own a home with substantial equity, you can borrow against it to finance new construction.

How they work:

Home equity loan: Lump sum borrowed against your current home's equity with fixed monthly payments over 10–30 years.

HELOC: Credit line against your equity, draw funds as needed during a 5–10 year draw period, pay interest only on amounts drawn, then enter repayment period.

Both use your existing home as collateral.

Requirements: Equity position allowing borrowing up to 80–90% of home value minus existing mortgage, 680–700 credit score, debt-to-income under 43–50%, stable income documentation.

Costs: Closing costs of 2–5% for home equity loans (HELOCs often have lower or no closing costs but may charge annual fees), interest rates 1–2 points above first mortgage rates for home equity loans, variable HELOC rates tied to prime rate.

Pros: Faster approval (often 2–4 weeks), flexible use of funds without lender oversight of construction, no construction loan requirements (no detailed plans or licensed contractor documentation needed), easier qualification if you have sufficient equity.

Cons: Your existing home is at risk if you can't repay, may not cover full construction costs, managing payments on two properties simultaneously, HELOC rate increases if prime rate rises.

Best for: Homeowners with substantial equity wanting faster, more flexible financing, those using equity for down payment and land purchase while securing separate construction loans, anyone who wants to avoid construction loan requirements.

FHA construction loans

FHA construction-to-permanent loans offer government-backed financing for borrowers who might not qualify conventionally.

How they work: Similar to conventional construction-to-permanent loans but with FHA backing that allows more flexible qualification. Converts to FHA mortgage after construction.

Requirements: 3.5% down with 580+ credit score (or 10% down with 500–579 score), debt-to-income up to 50–55% allowed, must be owner-occupied primary residence, FHA-approved contractor required, county-specific loan limits ($472,030–$1,089,300 for 2024).

Costs: Upfront mortgage insurance (1.75% of loan amount), annual mortgage insurance premiums (0.45–1.05% annually for loan life), interest rates comparable to conventional construction loans, standard closing costs (2–5%).

Pros: Low 3.5% down payment, easier qualification with lower credit scores and flexible underwriting, single closing structure, accessible to buyers without substantial savings.

Cons: Expensive mortgage insurance required for entire loan life (unlike conventional PMI that drops off), loan limits may be insufficient in high-cost areas, contractor must be FHA-approved (limiting choices), owner-occupancy required (no investment properties).

Best for: First-time builders with lower credit scores or limited down payment funds, owner-occupants whose construction costs fall within FHA limits.

VA construction loans

VA construction-to-permanent loans serve eligible veterans, active-duty service members, and surviving spouses.

How they work: Similar to conventional construction-to-permanent loans but with VA backing. Converts to standard VA mortgage after construction. Structure varies by lender—some offer true one-time-close, others use two separate VA loans.

Requirements: VA eligibility (generally 90+ days active service during wartime, 181+ days peacetime, or 6+ years National Guard/Reserves), Certificate of Eligibility, primary residence occupancy, VA-approved contractor, typically 620–640+ credit score (lender-specific), sufficient income for payments.

Costs: Zero down payment required for qualified veterans, VA funding fee of 1.4–3.6% (varies by down payment and service type, can be financed), no monthly mortgage insurance, standard closing costs (2–5% with VA limitations on charges).

Pros: No down payment required, no mortgage insurance (significant monthly savings), competitive rates (typically 0.25–0.5% lower than conventional), easier qualification than conventional construction loans.

Cons: Limited lender availability (fewer offer VA construction loans), eligibility restricted to veterans/service members, upfront funding fee adds thousands to loan balance, contractor must be VA-approved.

Best for: Eligible veterans and service members building primary residences. Often the best option for qualified borrowers due to zero down payment, no mortgage insurance, and competitive rates.

Not sure how to begin your renovation?

Get free, expert guidance from a dedicated Block Project Planner who can help you navigate proposals, timelines, contractor selection, and more.

Book A Free Consultation

How to choose the right financing option

Choose construction-to-permanent if: You meet conventional requirements (680+ credit, 20% down), want single-closing simplicity, and expect stable or rising rates.

Choose construction-only if: You expect rates to decline during construction, plan to improve credit/income during the build, or want permanent lender flexibility.

Choose owner-builder if: You have significant construction experience, can dedicate full-time attention for 6–12 months, and want to save on contractor fees. Requires highest expertise level.

Choose home equity financing if: You have substantial equity in your current home, want faster approval, and can manage two property payments during construction.

Choose cash if: You have sufficient liquid assets, want to avoid debt entirely, and aren't concerned about opportunity cost.

Choose FHA if: You have limited down payment (under 10%), credit scores of 500–680, and construction costs within FHA limits.

Choose VA if: You're an eligible veteran or service member and want minimal or zero down payment.

Partner with the right custom home builder with help from Block Renovation

Securing the right financing is only half the equation—you also need a contractor who understands how construction loans work and can navigate the lender relationship smoothly.

Block Renovation connects homeowners with thoroughly vetted, licensed, and insured builders experienced in working with construction lenders. Our contractors know how to provide the detailed documentation lenders require, coordinate draw schedules efficiently, and keep projects on timeline to avoid extended interest-only payment periods.

With Block, you'll receive detailed proposals from multiple pre-qualified contractors, significantly shortening the contractor selection phase that typically adds 2–6 weeks to your pre-construction timeline. Our project planners help you understand how different contractors' approaches affect your financing options and overall costs.

From pre-approval through final draw release, Block provides the guidance and contractor relationships you need to make construction financing work smoothly.

Ready to start building your new home with the right financing and the right contractor? Connect with Block Renovation today.

Remodel with confidence through Block

Connect to vetted local contractors

We only work with top-tier, thoroughly vetted contractors

Get expert guidance

Our project planners offer expert advice, scope review, and ongoing support as needed

Enjoy peace of mind throughout your renovation

Secure payment system puts you in control and protects your remodel

Get Started