Construction Loan Process

By Steven Roberts Updated on 7/19/2017

Considering building a house? Read to find out the construction to permanent financing process. 

Note that if you have found a piece of land or lot that is ideal but are not ready to break ground, a lot loan may be the best option for you. 

Often, the current landholder may be able to sell to you directly and work out a private payment plan.

1. Apply for financing. 

Find a trusted construction loan lender and prepare:

• A copy of last two months of bank statements.
• A copy of last 30 days' paystubs.
• A copy of past two years' W-2.
• A copy of past two years' tax returns.
• Landlords for past two years of renting.
• Driver's license, passport or state I.D.
• Property and lot documentation.
• Builder's plans and specifications

2. Get approved.

Financing will cover the cost of the lot and the interim construction. The interim construction includes the building, architectural design, utility hook-ups, water well, septic system, flatwork, driveway and or pool. Interim or construction financing describes the first half of the "construction-to-permanent" loan name, while the final, permanent mortgage accounts for the latter.

The application process goes this way:

• Appraisal and title ordered.
• Appraisal received.
• Interim loan submitted and approved.
• Title documents received.
• Closing documents sent to the title company.
• The interim loan closed.

3. Begin construction.

The interim/construction loan is a line of credit. This line of credit is established solely for paying the costs associated with the building of your custom home. It works just like a credit card. You make a charge as you need money to pay the construction bills. This charge is called a draw.

How interim construction loan draws work:

• A request is completed by you or your builder.
• The request is signed by you then forwarded to the interim lender.
• The interim lender sends an inspector to your home to for approval.
• The draw funds are now available after inspection.
• Like any credit card, you will pay interest on the amount charged.
• The credit balance will increase as you take draws.
• The payment of interim interest is made monthly. 

4. Transfer construction loan to permanent upon completion.

Borrowers can opt for a one-time or two-time close construction loan.

One-time Close Construction Loan: A one-time close interim or construction loan for your custom home requires you to close on the construction loan. When your home is complete, your tax and insurance escrows are collected then converted to a permanent loan program of your choice.

Two-Time Close Construction Loan: These come into play if your construction loan lender does not do permanent loans and requires repayment upon completion. 

At the intial closing and throughout construction, interest only payments are made to the lender. Upon project completion, a second closing with another lender is required to refinance the loan to a permanent mortgage.