Construction Loan Calculator
Calculate interest-only payments during construction period and permanent mortgage payments after completion.
Construction Loan
Construction Loan Risk Assessment
Your construction loan parameters look reasonable with manageable risk factors.
Total Project Cost
Land + Construction + Contingency
Recommended: 10-15% for cost overruns
Project Summary
Typical range: 7.5% - 10.5%
Loan Details
Project Cost Breakdown
Construction Loan Options
Total Project Cost Analysis
Construction Loan Tips
- Budget conservatively: 80% of construction projects exceed their initial budget
- Maintain reserves: Keep 10-15% contingency for unexpected costs
- Choose construction-to-perm: Save money with one closing instead of two
- Realistic timeline: Weather delays and supply issues are common - add buffer time
- Experienced builder: A proven builder reduces risk and may improve loan terms
Understanding Construction Loans
A construction loan is short-term financing specifically designed to cover the costs of building a new home or major renovation project. Unlike traditional mortgages where you receive a lump sum, construction loans disburse funds in stages (called "draws") as construction progresses. These loans typically last 6-18 months during the build phase, then convert to a permanent mortgage once construction is complete.
Key Construction Loan Terms
Construction-to-Permanent Loan
A two-in-one loan that covers construction costs initially, then automatically converts to a traditional mortgage when the home is completed. This saves you from having to qualify and close on two separate loans, reducing costs and paperwork significantly.
Draw Schedule
The predetermined timeline and milestones when construction funds are released. Typically 4-7 draws occur at major completion stages: foundation, framing, rough mechanicals, drywall, and final completion. Lenders inspect before releasing each draw to verify work progress.
Interest-Only Period
During construction, you typically pay only interest on the funds that have been drawn down so far. Principal repayment doesn't begin until construction completes and the loan converts to a permanent mortgage with full principal and interest payments.
Loan-to-Cost (LTC) Ratio
The percentage of total project costs the lender will finance, typically 75-85%. On a $400,000 build with 80% LTC, the lender provides $320,000 and you need $80,000 in cash or equity. This ratio determines your required down payment or equity contribution.
Appraised Value
The estimated market value of the completed home, determined by a professional appraiser based on your building plans and comparable sales. Lenders use either the appraised value or actual cost (whichever is lower) to calculate maximum loan amounts.
Builder Requirements
Most lenders require you to hire a licensed, insured contractor with proven experience. Owner-builders (those acting as their own general contractor) face stricter requirements and may need substantial construction experience or pay higher rates.
How Construction Loans Work
Prepare Detailed Building Plans
Create comprehensive architectural plans, obtain necessary permits, and get detailed contractor bids. Lenders need complete specifications including blueprints, materials lists, and itemized construction budgets. Budget typically includes land cost (if not owned), hard costs (materials and labor), and soft costs (permits, inspections, utilities during construction).
Apply and Get Pre-Approved
Submit your loan application with construction plans, contractor information, personal financial documents, and project timeline. Lenders verify your credit (typically need 680+ score), income, assets, and review the builder's credentials. Approval process takes 30-60 days, longer than traditional mortgages due to additional scrutiny of construction plans and contractor qualifications.
Close on the Construction Loan
At closing, you'll pay your down payment (typically 20-25% of total project cost) plus closing costs (2-5% of loan amount). The lender establishes the draw schedule tied to specific construction milestones. You may receive an initial draw at closing to purchase land or pay initial contractor mobilization costs. Interest begins accruing only as funds are drawn.
Construction Phase with Progressive Draws
As construction progresses, your contractor requests draws at predetermined milestones. The lender sends an inspector to verify work completion before releasing funds. You pay interest-only on the outstanding balance during this phase. Draw requests typically require contractor invoices, lien waivers from subcontractors, and inspection approval. This phase lasts 6-18 months depending on project complexity.
Conversion to Permanent Mortgage
Once construction completes and you receive a certificate of occupancy, the loan automatically converts to a permanent mortgage (in construction-to-permanent loans) or you apply for a new mortgage to pay off the construction loan (in construction-only loans). The permanent mortgage begins standard principal and interest payments over 15-30 years based on the final loan amount and agreed terms.
Types of Construction Loans
Construction-to-Permanent Loan (Single Close)
The most popular option where you close once and get both construction financing and permanent mortgage. After construction completes, the loan automatically converts to a traditional mortgage without additional closing costs or qualification requirements.
✓ Advantages:
- • Single application and closing process
- • Lock interest rate at beginning
- • Lower total closing costs
- • Less paperwork and hassle
✗ Disadvantages:
- • If rates drop, you're locked in
- • Stricter qualification requirements
- • Less flexibility to change lenders
Construction-Only Loan (Two-Close)
Separate short-term loan covering only the construction period. When building finishes, you apply for a traditional mortgage to pay off the construction loan. This requires two separate closings with associated fees and qualification processes.
✓ Advantages:
- • Flexibility to shop for best mortgage rate later
- • Can switch lenders after construction
- • Potential to get better rate if they drop
- • Shorter initial approval process
✗ Disadvantages:
- • Two sets of closing costs (4-8% total)
- • Must requalify for permanent mortgage
- • Interest rate risk if rates rise
- • More complex overall process
Renovation Construction Loan
For major renovations or additions to existing homes. These loans finance the purchase price plus renovation costs, or refinance existing mortgages while funding construction. Popular options include FHA 203(k) and Fannie Mae HomeStyle loans.
Common Uses:
- • Major home additions (rooms, second stories)
- • Complete kitchen or bathroom remodels
- • Structural repairs and foundation work
- • Converting spaces (basement, garage, attic)
- • Combining multiple renovations into one loan
Owner-Builder Construction Loan
For experienced individuals who want to act as their own general contractor. These loans have stricter requirements due to higher risk, including substantial construction experience documentation, higher down payments (25-30%), and potentially higher interest rates.
Requirements typically include:
- • Documented construction/project management experience
- • Detailed project timeline and budget
- • Proof of ability to hire and manage subcontractors
- • Higher cash reserves (6+ months expenses)
- • Strong credit score (700+) and income stability
Construction Loan Costs & Fees
Construction loans typically cost more than traditional mortgages due to higher risk and complexity. Understanding all costs helps you budget accurately and avoid surprises during the building process.
Typical Cost Structure
Example Cost Breakdown
$400,000 total project cost:
- • Land value: $100,000 (owned or purchased)
- • Construction costs: $280,000 (hard + soft costs)
- • Contingency (10%): $28,000
- • Down payment (20%): $80,000 out of pocket
- • Loan amount: $320,000 at 7.5% interest
- • Interest during construction (6 months avg): ~$6,000
- • Origination fee (1.5%): $4,800
- • Inspections/fees: $3,500
- Total cash needed at start: ~$95,000
Qualification Requirements
Construction loans have stricter qualification standards than traditional mortgages due to the higher risk involved. Lenders want assurance you can complete the project and afford the permanent mortgage.
Credit Requirements
- •Minimum score: 680 (some lenders require 700+)
- •Clean history: No bankruptcies within 2-4 years
- •Stable payments: No recent late payments or defaults
- •Low DTI: Debt-to-income ratio under 43% (prefer 36%)
Financial Requirements
- •Down payment: 20-25% of total project cost in cash or equity
- •Cash reserves: 6-12 months of mortgage payments plus expenses
- •Stable income: 2+ years employment in same field
- •Contingency funds: 10-20% buffer for cost overruns
Project Requirements
- •Detailed plans: Complete architectural drawings and specifications
- •Itemized budget: Line-by-line construction cost breakdown
- •Timeline: Realistic construction schedule with milestones
- •Permits approved: All necessary building permits obtained
Builder/Contractor Requirements
- •Licensed: Valid contractor's license in good standing
- •Insured: General liability and worker's comp insurance
- •Experienced: Proven track record with similar projects
- •References: Past client references and project portfolio
Common Construction Loan Mistakes
Underestimating Total Costs
The #1 mistake is budgeting too tightly without adequate contingency reserves. Unexpected issues (soil problems, weather delays, material price increases, design changes) typically add 10-20% to original budgets. Always include a 15-20% contingency and have additional cash reserves available. Running out of money mid-construction can force you to accept subpar work or default on the loan.
Choosing the Wrong Builder
Going with the lowest bid or an unlicensed/uninsured contractor saves money initially but often costs more through delays, poor workmanship, and legal issues. Always verify licenses, insurance, references, and past work quality. A $20,000 price difference seems huge until you're stuck with $50,000 in remediation work or a half-finished home because the builder went bankrupt or abandoned the project.
Poor Communication with Lender
Missing draw request deadlines, providing incomplete documentation, or not coordinating inspections delays fund disbursement and can stall construction. Contractors may leave for other jobs when payment is delayed. Maintain regular communication with your lender, submit draw requests promptly with all required documentation, and schedule inspections well in advance.
Unrealistic Timeline Expectations
Most custom home builds take 8-16 months, not the 6 months you might see on TV. Weather, supply chain issues, permit delays, and inspection requirements add time. Budget extends your interest-only period and your temporary housing costs. Plan for construction taking 25-50% longer than the contractor's "ideal" timeline and ensure your loan term accommodates potential delays.
Making Major Changes Mid-Construction
Every change order adds cost (typically 15-25% above if done initially) and delays. Moving a wall, upgrading fixtures, or changing materials requires additional approvals, re-inspection, and contractor premium pricing. Make all major decisions during the planning phase. If changes are absolutely necessary, get detailed written quotes and adjust your budget before proceeding.
Tips for Construction Loan Success
Before Applying
- ✓Get pre-qualified to understand your budget constraints
- ✓Interview 3-5 builders and check references thoroughly
- ✓Create detailed plans with architect before loan application
- ✓Get multiple contractor bids for accurate cost estimates
- ✓Research permit requirements and timeline in your area
During Construction
- ✓Visit the site weekly and document progress with photos
- ✓Maintain open communication with builder and lender
- ✓Submit draw requests promptly with complete documentation
- ✓Keep detailed records of all changes and additional costs
- ✓Address issues immediately before they become major problems
Financial Management
- ✓Keep 20-30% extra cash reserves beyond your contingency
- ✓Track every expense against your itemized budget
- ✓Make interest-only payments on time during construction
- ✓Don't make major purchases that affect your debt-to-income
- ✓Maintain stable employment through the construction period
Project Management
- ✓Get everything in writing—never rely on verbal agreements
- ✓Review and approve all change orders before work proceeds
- ✓Verify lien waivers from all subcontractors before final payment
- ✓Conduct thorough walk-throughs at each major milestone
- ✓Keep copies of all warranties, permits, and inspection reports
Related Topics & Keywords
Frequently Asked Questions
How much do I need for a down payment on a construction loan?
Most lenders require 20-25% down payment on construction loans, higher than traditional mortgages (3-20%). On a $400,000 project, expect to provide $80,000-$100,000 upfront. This can include land equity if you already own the property. Higher down payments may qualify you for better interest rates and more favorable terms.
What credit score do I need for a construction loan?
Minimum credit scores are typically 680-700, higher than conventional mortgages. Some lenders require 720+ for best rates. Your credit score affects both approval and interest rates—a 720 score might get 7% while 680 gets 8.5%. Work on improving your credit before applying if you're below 700. Pay down debts, correct any errors on your credit report, and avoid opening new credit accounts.
Can I be my own general contractor with a construction loan?
Yes, but it's challenging. Owner-builder loans require documented construction experience, detailed project management plans, higher down payments (25-30%), and stronger financial reserves. Many lenders don't offer owner-builder loans at all. Unless you have professional construction experience and substantial time to dedicate to the project, hiring a licensed general contractor is strongly recommended.
What happens if construction goes over budget?
You're responsible for covering cost overruns from your own funds—lenders won't increase the loan amount mid-construction. This is why a 15-20% contingency reserve is essential. If you can't cover overruns, you may need to make compromises on finishes, reduce scope, or seek alternative financing (though this is difficult mid-project). Always budget conservatively and maintain significant cash reserves.
How long does construction loan approval take?
Expect 30-60 days from application to approval, longer than traditional mortgages. Lenders review construction plans, contractor credentials, appraisals, and your financial qualifications in detail. Provide complete documentation upfront to avoid delays: final plans, itemized budget, contractor information, proof of permits, and personal financial documents. Incomplete applications can take 90+ days.
Should I choose a construction-only or construction-to-permanent loan?
Construction-to-permanent (single-close) loans are generally better for most borrowers. You close once, save on fees (4-8% vs 2-4%), lock your rate early, and avoid requalifying. Choose construction-only if: you expect significant income changes, rates might drop substantially, or you want flexibility to choose a different permanent lender. The rate-lock benefit of single-close usually outweighs potential savings from rate shopping later.
Ready to Calculate Your Construction Loan?
Use our calculator above to estimate your construction loan payments, total costs, and project timeline. Get detailed breakdowns of draw schedules, interest costs, and budget requirements for your custom home build.
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