To finance new construction, most buyers use a construction loan that funds the build in stages and then converts to, or is replaced by, a permanent mortgage. The right structure depends on whether you already own the lot, your builder, your down payment, and how stable your income and credit profile will be through completion.
A newly built home can feel more straightforward than buying an existing property, but the financing is usually more detailed. The lender is underwriting not only you as the borrower, but also the land, building plans, construction budget, appraisal, contractor, and timeline. Planning these pieces before signing a construction contract can prevent expensive surprises later.
How finance new construction loans work
A construction loan releases money through draws rather than giving the builder the full loan amount on day one. Before each draw, the lender may require an inspection to confirm that completed work supports the next payment. This helps protect the borrower, lender, and builder by matching loan funds to actual progress.
During construction, borrowers commonly make interest-only payments on the amount already disbursed. Because the balance starts lower and rises as construction continues, these payments may begin relatively low and increase over time. Once the home is complete, the financing moves into a standard mortgage with principal and interest payments.
The most common choices are a one-time-close construction-to-permanent loan and a two-time-close arrangement.
| Loan structure | How it works | Main consideration | |—|—|—| | Construction-to-permanent loan | Construction financing converts to a mortgage after completion, usually with one initial closing. | It may reduce repeat closing costs and paperwork, but program rules and builder approval requirements can be strict. | | Construction-only loan | A short-term loan funds the build, then you obtain a separate permanent mortgage. | This can offer more flexibility later, but it creates a second approval, closing, and potential payment or rate changes. | | Builder financing | The builder or its affiliated lender offers financing options for the build. | Incentives can be useful, but compare the total loan costs, terms, and flexibility with other options. |
A one-time-close loan is often attractive because it gives buyers more certainty before construction begins. Still, it is not automatically the right answer. If your plans, income, or permanent loan strategy may change before completion, a separate permanent loan can sometimes provide more flexibility. The tradeoff is that you will need to qualify again when the home is finished.
What lenders look at before approving construction financing
Construction financing involves a larger set of documents than a typical purchase loan. In addition to reviewing credit, assets, debts, and income, a lender generally evaluates the project itself.
The lender may ask for a signed construction contract, detailed specifications, a line-item budget, floor plans, permits or permit status, a timeline, and proof of insurance. The builder often must meet lender requirements for licensing, experience, insurance, financial stability, and past project history. A qualified borrower may still be unable to use a particular loan program if the builder does not meet the lender’s standards.
The appraisal is also different. Instead of valuing a finished home that already exists, the appraiser estimates the property’s value after completion using the lot, plans, specifications, and comparable new homes. If the appraised value comes in below the total land-and-construction cost, you may need to bring in more cash, revise the project, or explore another financing structure.
Your income matters throughout the process, not just on the day you apply. Avoid taking on new debt, changing jobs unnecessarily, opening new credit accounts, or making large undocumented deposits while the loan is in progress. Lenders commonly recheck credit, employment, assets, and other qualification items before the permanent mortgage is finalized.
Down payment, land equity, and cash reserves
The down payment for a new construction loan varies by program, lender guidelines, credit, income, property type, and the overall risk of the project. Conventional construction loans may allow qualified buyers to finance a substantial portion of the completed appraised value, while FHA, VA, jumbo, and non-QM construction options each have their own rules and availability.
If you already own the lot, its equity may count toward your required investment. For example, a borrower who bought land years ago may be able to use the current land value, rather than only the original purchase price, when the lender calculates equity. This can reduce the amount of additional cash needed, though appraisal results and program rules vary.
Your cash needs go beyond the down payment. Set aside funds for closing costs, prepaid taxes and insurance, design changes, landscaping, appliances not included in the contract, and delays. A construction contingency is particularly important. The initial budget may not cover upgrades, site work, utility connections, material price changes, or changes requested after work begins.
Loan programs that may fit a new build
Conventional construction-to-permanent loans are a common option for borrowers with established credit, documented income, and a qualified builder. They can work well for primary residences and, depending on the lender, certain second homes or higher-priced properties.
FHA construction financing may be available for buyers who need a lower down payment option, but lender participation and property requirements can be more limited. VA one-time-close construction loans may be available for eligible veterans, active-duty service members, and qualifying surviving spouses. A VA loan can be especially worth evaluating because eligible borrowers may qualify with no down payment, although builder approval and lender overlays remain important.
For buyers building a higher-priced home, a jumbo construction loan may be appropriate. Self-employed borrowers may also have options based on tax returns, bank statements, or other documentation, depending on the loan program. These loans are not interchangeable. The best path depends on how income is documented, the expected loan amount, reserves, and the construction project’s specifics.
Questions to settle before signing with a builder
Before committing earnest money or paying for architectural plans, ask how your builder handles lender draws, change orders, delays, and budget overruns. A fixed-price contract can provide more predictability, but read what is excluded from that price. Site preparation, permits, retaining walls, pools, landscaping, and utility work may be separate expenses.
Confirm whether the builder is approved by your intended lender before moving too far into the process. Some lenders will review and approve a builder after you apply, but that review takes time and is not guaranteed. It is also wise to clarify the expected completion date, what happens if the project exceeds the loan term, and whether extension costs could apply.
Compare financing options based on total cost and fit, not simply the monthly payment during construction. One loan may have a lower upfront cash requirement but tighter underwriting. Another may offer more flexibility but require two closings. A mortgage broker can compare programs across wholesale lending partners, while a builder’s lender may have incentives tied to the specific community or construction contract.
A practical way to prepare for financing new construction
Start with a realistic total project budget before falling in love with upgrades. Include the land price or land value, construction contract, contingency funds, closing costs, and the completed home’s expected tax and insurance costs. Then have your borrowing capacity evaluated using the payment you will have after the home is complete, not only the temporary interest-only construction payment.
If you are building in Gilbert, Chandler, Mesa, Queen Creek, or elsewhere in the Phoenix area, local property taxes, lot conditions, HOA requirements, and builder availability can shape both the budget and timeline. A new build in a planned community may have a different financing path than a custom home on rural land with well, septic, or extensive site-work needs.
The most useful next step is to discuss your lot, builder, budget, and income documentation with one of our licensed loan officers before your contract becomes difficult to change. Price Mortgage can help you compare construction financing structures and identify questions that should be answered early, when you still have room to make confident decisions.
