5 Things to Know Before Applying for a Construction Loan

Essential Tips for Construction Financing

Before you dive into the custom home building process, understanding how construction financing works is critical. Here are five essential things to know.

1. You Need a Solid Down Payment

Construction loans typically require more equity than buying an existing home. Expect to need at least 15% down for conforming loan amounts, and 20% to 30% for jumbo and super jumbo loans.

2. The Appraiser Evaluates the Future Value

Because the home doesn't exist yet, the appraiser uses your plans and builder specifications to determine what the home will be worth once completed, comparing it to similar completed homes in the area.

3. Interest-Only Payments During Construction

During the build phase, you only pay interest on the funds that have been disbursed (drawn) to the builder. Your payments will start small and increase as construction progresses.

4. Timelines Matter

Construction loans have specific build periods—typically 12 months for conforming loans, 18 months for jumbo, and up to 24 months for super jumbo loans. Ensure your builder's timeline aligns with your loan terms.

5. Choose the Right Lender

Construction lending is a highly specialized field. Working with a lender who understands the intricacies of Texas One-Time Close Loans, draw schedules, and builder approvals is the most important decision you can make.