A $900,000 construction loan at 6.50% on a 30-year permanent loan has an estimated principal-and-interest payment of $5,688 per month. At 6.75%, that payment rises to about $5,837 – a $149 monthly difference and $8,940 more in scheduled payments over five years. That is why learning how construction loans work before choosing a builder, lot, or financing structure can protect far more than your credit score.
Construction financing is not one oversized mortgage payment handed over on closing day. It is a controlled funding process that pays for land, labor, materials, inspections, and the completed home in stages. For buyers building in Short Pump, Glen Allen, or Midlothian, the details matter even more when local inventory is tight and well-located buildable lots face competition from both families and small investors.
By Duane Buziak, NMLS #1110647
Table of Contents
- What a construction loan actually finances
- Construction-to-permanent loans and stand-alone loans
- How draws, inspections, and interest-only payments work
- A $900,000 worked construction-loan example
- Credit, down payment, and reserve expectations
- Choosing a broker for a custom build
- Construction loan FAQs
What a construction loan actually finances
A construction loan is short-term financing used to build a home from the ground up. Depending on the structure, it may cover the lot purchase or lot payoff, site work, permits, foundation, framing, mechanical systems, finishes, and contingency reserves. The broker and construction financing provider review the builder contract, plans, specifications, timeline, budget, appraisal, and borrower qualifications before closing.
The appraisal is based largely on the home’s projected completed value, commonly called the “as-completed” value. That distinction is critical. A $1.125 million finished-home appraisal does not automatically mean the entire $1.125 million is financed. Your approved loan is constrained by the program’s loan-to-value rules, your verified income and assets, and the documented construction budget.
For perspective, the baseline conforming loan limit for a one-unit property was $806,500 in 2025, according to the Federal Housing Finance Agency’s conforming-loan-limit release. A $900,000 permanent loan therefore generally falls into jumbo territory in most counties, making reserve requirements, debt-to-income analysis, and the strength of the completed appraisal especially important.
In Virginia, values vary materially by location. Redfin reported a Henrico County median sale price of approximately $400,000 in 2024 market reporting. A custom build in Glen Allen or Short Pump can price well above that midpoint, particularly when the lot, school zone, finish package, and square footage are above typical resale inventory. The same is true in parts of Chesterfield County around Midlothian, where limited ready-to-build lots can shift negotiating power toward sellers and builders.
Construction-to-permanent versus two-time-close financing
The most common option is a construction-to-permanent loan, also called a one-time-close loan. It begins as construction financing and converts into the long-term mortgage after the home receives its certificate of occupancy. You close once, rather than closing again when construction ends.
A stand-alone construction loan works differently. You close on the construction financing first, then refinance into a separate permanent mortgage when the build is complete. This can be useful when a borrower expects income, assets, credit, or market conditions to improve during construction. The trade-off is a second approval, a second closing process, and exposure to future mortgage-rate conditions.
A one-time-close structure can offer more certainty. A two-time-close structure can offer more flexibility. The right answer depends on your builder, the lot, your liquidity, and whether your long-term financing profile is already strong enough to lock in today.
How construction loan draws work
After closing, funds are not released all at once. The construction financing provider releases money through draws tied to completed work. A typical schedule may include a draw for the foundation, framing, rough mechanical work, drywall, cabinetry, and final completion.
Before each draw, an inspection confirms that the required phase is complete. The builder submits a request, the work is reviewed, and approved funds are released. This protects the borrower from paying ahead of progress and helps ensure the project stays aligned with the original budget.
During construction, borrowers commonly make interest-only payments on the amount already disbursed, not necessarily on the full approved balance. If delays occur because of weather, permitting, material shortages, or change orders, the interest-only period may last longer. That is one reason a contingency line in the budget and meaningful cash reserves matter.
The $900,000 construction-loan example
Assume a buyer is building a $1,125,000 home and contributes 20%, or $225,000, toward the project. The resulting construction-to-permanent loan amount is $900,000.
At the halfway point of the build, assume $450,000 has been disbursed. At an illustrative 7.25% construction interest rate, the monthly interest-only payment is approximately $2,719: $450,000 multiplied by 7.25%, divided by 12. That payment rises as additional draws are released.
Once the home is complete, assume the loan converts to a 30-year fixed mortgage at 6.50%. The estimated principal-and-interest payment becomes $5,688 per month. Taxes, homeowners insurance, HOA dues, and any required mortgage insurance are separate. If the permanent rate were instead 6.75%, the estimated principal-and-interest payment would be $5,837. The $149 difference is not abstract – over 60 payments, it totals $8,940 before considering the different principal balances created by each payment schedule.
Credit, down payment, and reserve expectations
Construction underwriting is typically more document-intensive than a standard purchase because the project itself must qualify alongside the borrower. Conventional construction programs may look for credit scores around 680 or higher, while jumbo construction options often prefer 700 to 720 or above. Strong compensating factors can help, but a higher score generally creates more program flexibility.
Down payment requirements vary. A well-qualified borrower may use 10% to 20% down in certain circumstances, while jumbo builds frequently call for 20% or more. If you already own the lot free and clear, its documented equity may count toward the required contribution, subject to program guidelines and appraisal.
Reserves are equally important. A conventional file may require several months of total housing payments in verified liquid assets. Larger jumbo construction loans may require six to 12 months of reserves, particularly for self-employed applicants, complex income, or debt-to-income ratios near program limits. Closing costs often range from 2% to 5% of the loan amount, depending on title work, inspections, escrows, points, and whether the transaction uses one closing or two.
Self-employed buyers should not assume a tax return tells the whole story. Bank statement, asset depletion, and other non-QM options may better reflect real cash flow for business owners, investors, and high-asset households. Those programs require careful analysis early, before a builder contract makes timing less flexible.
Why a broker structure matters for construction financing
A construction loan has too many moving parts for a call-center approach. You need a broker who can coordinate your financial profile, builder paperwork, draw schedule, appraisal strategy, and permanent-loan plan without treating the transaction as a standard resale file.
| Dimension | Mortgage broker approach | Single-shelf institution approach |
|---|---|---|
| Program selection | Can evaluate multiple construction, jumbo, conventional, and non-QM program options. | Limited to its own available product shelf. |
| Builder review | Coordinates requirements among the borrower, builder, title team, and financing provider. | Process and builder acceptance rules may be narrower. |
| Complex income | Can compare tax-return, bank-statement, and asset-based qualification paths. | May rely primarily on its standard documentation route. |
| Service model | Direct advisory contact and transaction-specific guidance. | Often structured around centralized processing workflows. |
| Credit preview | May offer a soft credit pull mortgage prequalification before a full application. | Credit process varies by institution and platform. |
Premium Mortgage Rates offers a 24-Hour Guarantee for a response and clear next-step plan, not a promise of approval. For buyers in Virginia, Florida, Tennessee, and Georgia, that kind of early clarity can be valuable when a lot reservation or builder timeline is moving quickly.
A soft credit pull mortgage review can often help estimate qualifying range without an immediate hard inquiry. A no hard inquiry mortgage pre approval is not the same as final underwriting, however. Final approval commonly requires a full application, supporting documents, appraisal, builder review, and a credit report meeting program requirements. Ask specifically whether your initial mortgage pre approval without hard pull is a preliminary prequalification or a fully underwritten commitment.
Construction Loan FAQs
1. Do construction loans require a down payment?
Usually, yes. Requirements commonly range from 10% to 20% or more, with jumbo builds often requiring a larger contribution and stronger reserves.
2. Can land equity count as my down payment?
Often it can. If you own the lot, documented equity may be credited toward your required contribution, subject to appraisal and program rules.
3. Do I make full mortgage payments during construction?
Usually not. Many programs require interest-only payments on funds already disbursed during the build phase.
4. What happens if the builder needs more money than expected?
Change orders and overruns can require additional borrower funds, a revised approval, or both. A contingency budget is essential.
5. Can I use a VA construction loan?
Eligible veterans may have construction financing options, but builder approval, program availability, and documentation requirements are highly specific. A VA loan structure should be reviewed before signing a builder contract.
6. Can self-employed buyers qualify for construction financing?
Yes. Tax returns are common, but bank statement and asset-based qualification may be appropriate for some borrowers.
7. Will a soft pull affect my credit score?
A soft pull generally has no credit score impact. Confirm the type of inquiry before authorizing any no credit hit mortgage application or preliminary review.
8. How long does construction financing last?
The construction period is often six to 12 months, though larger or more complex builds can require longer timelines.
A careful start is the premium advantage
The best time to solve construction-financing questions is before the builder contract, not after the first draw request. Start with a realistic budget, a clear reserve plan, and a credit strategy that separates a soft-pull conversation from formal underwriting. Ask about our no-out-of-pocket closing options where available, and build your financing plan with the same care you expect from the home itself.
Legal disclaimer: This article is for general educational purposes only and is not a commitment to extend credit, an approval, or financial, legal, or tax advice. Rates, terms, program availability, credit requirements, reserve requirements, and construction guidelines can change and depend on borrower qualifications, property type, builder approval, appraisal, and applicable program rules. Mortgage services and actionable mortgage guidance are available only where Duane Buziak is licensed: Virginia, Florida, Tennessee, Georgia, and DC.
Duane Buziak | Mortgage Maestro | NMLS #1110647 | Coast2Coast Mortgage, LLC NMLS #376205 | Licensed in VA, FL, TN, GA & DC [Contact] | NoTouch Credit Pull available — no hard inquiry, no credit hit.