Construction Loans — New Build & Major Renovation Financing

What a construction loan is

A construction loan funds the ground-up build of a new home (or a major renovation) with money released in stages ("draws") as work is completed. During construction, the borrower pays interest only on the drawn portion. At certificate of occupancy, the loan either modifies into a permanent mortgage (one-time-close) or is paid off by a separate permanent refinance (two-time-close).

How construction financing works — the actual mechanics

The lender approves the borrower, the licensed builder, the plans and specs, and an appraisal-as-completed ("subject-to"). Funds are held in a construction escrow. As each stage is finished — foundation, framing, dry-in, mechanicals, finish — a third-party inspector verifies progress before the next draw releases. During construction the borrower pays interest only on funds already drawn.

Options we offer

• Conventional One-Time-Close (Fannie/Freddie CTP): single closing, typically 10–20% down; rate locks up front.
• FHA One-Time-Close: 3.5% down subject to FHA loan limits, mortgage insurance premiums (upfront + annual MIP) apply.
• VA One-Time-Close: 0% down for eligible veterans, subject to VA appraisal and builder approval; VA funding fee applies unless exempt.
• USDA New-Construction: 0% down in eligible rural areas; guarantee fee and annual fee apply.
• Two-Time-Close: separate construction and permanent loans — more flexibility, two sets of closing costs.
• FHA 203(k) Renovation: purchase + rehab on an existing home (Standard for structural work; Limited for cosmetic).

Single-closing construction-to-permanent: the agency rules that govern it

On a conventional single-closing construction-to-permanent loan, the loan documents already contain the terms of the permanent financing, so the construction loan converts automatically to a long-term mortgage when the home is finished. The construction period cannot include any single period longer than 12 months, and the total construction period cannot exceed 18 months. Maximum loan-to-value is 95%, and the loan can be either a purchase or a limited cash-out refinance — a cash-out refinance is not eligible on a single-closing construction-to-permanent transaction.

Which purpose applies depends on the lot: if you are not the owner of record of the lot when the first construction advance is made, the transaction is a purchase; if you already own the lot at that point, it is a limited cash-out refinance. On a purchase, loan-to-value is calculated against the lesser of the purchase price (construction cost plus the lot sales price) or the as-completed appraised value. On a limited cash-out refinance, it is calculated against the as-completed appraised value of the lot plus improvements.

• Down payment source: you must use your own funds for the minimum borrower contribution unless the LTV/CLTV is 80% or less, or you are buying a one-unit principal residence and qualify to use gifts, grants, or employer assistance.
• Property types: site-built single-family homes and manufactured homes are both eligible.
• Revisions at conversion: when construction is complete, the interest rate, loan amount, loan term, and amortization type may be modified — amortization changes are limited to ARM-to-fixed.
• Document age: credit documents must be no more than four months old at the construction note date. Income, employment, and credit must also be no more than four months old at conversion, extended to as much as 18 months only if the LTV/CLTV/HCLTV did not exceed 95% and the file received an automated Approve/Eligible at the original closing. Otherwise you are requalified with updated documents within four months of conversion.
• Assets: updated asset documentation is not required at conversion unless requalification calls for more reserves, or you bring additional funds to the transaction.

Locking the permanent rate at the initial closing is one of the real advantages here: if rates fall during construction, some programs allow the converted permanent rate to be improved at conversion. Ask a Simply Approved Mortgages Loan Officer what applies to your specific program.

Investor ground-up construction (business purpose)

Ground-up builds on non-owner-occupied, business-purpose projects run on their own matrix rather than agency rules. Typical published parameters: entity borrowers only, up to 90% loan-to-cost and 75% of as-completed value (ARV), loan amounts of $100,000 to $3,000,000 (over $1,000,000 requires committee approval), and 12, 15, 18, 21, or 24-month interest-only terms with no prepayment penalty — terms beyond 15 months require management approval.

• Credit: 660 minimum FICO with 2 or more completed new-construction projects in the last three years; 720 with only one. One structural rehab or licensed general-contractor home-building experience in the last 36 months can substitute.
• General contractor: a licensed builder is required, and on a one-project-experience file the GC must have 3+ new construction projects and must prepare the budget and scope of work.
• Permits: with one project of experience, approved permits are required before closing; with 2–4, permits must at least be submitted for approval before closing; with 5 or more, approved permits are not required until the first draw. All approved permits must reach the lender within 90 days of closing.
• Eligible property: residential, non-owner-occupied, business-purpose only — single-family, PUD, townhome, and 2–4 unit. Multifamily, rural, mixed-use, manufactured, modular, log homes, land, and commercial are ineligible; condos are case-by-case. Declining markets require 2+ projects of experience and a 5% LTV reduction.
• Budget: funded up to 100% with borrower equity contributed up front; soft costs may be included, and draws are released against inspected completed work.

These are business-purpose loans originated under Regulation Z's business-purpose exemption, not consumer mortgages. Market, city, and state restrictions apply, and Simply Approved Mortgages is licensed in a limited number of states — your loan officer will confirm availability.

Ground-up borrowing tiers, lot rules, and mid-construction refinancing

Investor ground-up programs also tier by verified building experience, and the lot itself is underwritten separately from the vertical construction:

• Tiers: eligibility commonly starts at 5–11 completed transactions (roughly $2,000,000 cumulative sales price) at a 660 minimum score, rising through 12–23 transactions (roughly $4,000,000) and 24+ (roughly $6,000,000). A minimum of five new-construction projects completed in the last three years is a common baseline; verified general-contractor experience on five or more builds without being on title, or twelve flips in the last 36 months using a hired third-party builder, may be accepted case by case.
• Lot / property value basis: typically the lower of the purchase price or lot value (opinion of site value plus site improvements), funded at roughly 65%, with 100% of the construction budget funded, up to about 80–90% blended loan-to-cost and 70% of after-completion value. Cash-out refinances usually take a 5% reduction to the after-repair-value cap.
• Seasoning: a six-month lot seasoning requirement is common, and lots seasoned only six to twelve months are frequently ineligible for cash out.
• Lot condition: lots must be fully entitled and ready to build within 90 days of funding — split and individually taxed, municipal utilities lateral-ready, and properly zoned before closing.
• Terms: 19- or 24-month interest-only balloons are standard on ground-up.
• Concentration: lenders limit concurrent exposure per borrower and typically finance no more than 20% of the buildable lots in a single development at one time absent an exception.
• Mid-construction refinance: possible case by case — the lender assesses site value less improvements as the property value basis and reimburses completed work per the approved budget. Any property that has never been issued a certificate of occupancy is treated as new construction.

Who this fits

Buyers building a custom home on a lot they own or plan to purchase, owner-builders financing a spec-plan build with a licensed GC, and buyers of homes that need significant renovation before they are livable (203(k)).

What to expect

You will provide a signed builder contract, plans and specs, a detailed line-item cost breakdown, and a builder résumé. A Simply Approved Mortgages Loan Officer will walk you through the appraisal-subject-to process and the draw schedule before you break ground.

Rates and fees shown anywhere on this site are illustrative and not a quote, lock, offer, or commitment to lend. Binding figures appear on your Loan Estimate.

The structural rules behind a construction loan

Construction financing is not sized or disbursed the way a purchase loan is. These are the mechanics that govern draws, inspections, and the conversion to permanent financing.

Program parameters above are published by the agencies and enterprises named in the right-hand column and can change. They describe program rules, not an offer; eligibility, terms, conditions, and availability vary by borrower, property, lender, loan program, and state, and all loans are subject to lender underwriting and approval.

Why construction loans are underwritten twice

A construction loan carries two distinct risks a purchase loan does not: the risk that the project is never finished, and the risk that it is finished for more than budgeted. That is why lenders underwrite the builder as carefully as the borrower, why draws are tied to inspected progress rather than a calendar, and why a contingency reserve is commonly required above the contracted price. A borrower who shops only for the best rate and skips vetting the builder's track record is taking on the larger risk in the transaction.

One-time-close versus two-close: what actually changes

A one-time-close loan locks the permanent-financing terms before the first shovel goes in the ground, which removes the risk of qualifying twice — once at the start and again after the home is built, when your income, credit, or the rate environment may have changed. The tradeoff is less flexibility if the project's final cost or your circumstances shift meaningfully during construction. A two-close structure gives more room to adjust between the construction phase and the permanent loan, at the cost of underwriting the borrower a second time and absorbing a second set of closing costs.

What actually derails a construction timeline

The most common cause of delay is not the lender — it is change orders that were not budgeted, permitting timelines that ran longer than the builder estimated, or a draw request submitted before the corresponding inspection could be scheduled. Building slack into the contingency reserve, confirming the builder's permitting history in the specific jurisdiction, and understanding the draw and inspection cadence before signing the construction contract prevents most of the friction that shows up mid-project.

What underwriting reviews for a construction loan

Because the loan converts to a permanent mortgage, income is qualified against the eventual permanent payment, not just the construction-period interest.

Documentation requirements vary by lender, program, and file. The list above describes what underwriting commonly accepts, not a determination about your income or your approval.

Construction loan structures compared

The choice usually comes down to how much certainty you want locked in before the build starts.

A worked example of a draw schedule

A construction budget of $380,000 might be released across stages such as foundation, framing, mechanical rough-in, and final completion, with an inspection confirming each stage before the next draw funds. If a change order adds $12,000 mid-project, a contingency reserve set aside at closing absorbs it without reopening the original underwriting — which is why lenders ask for that reserve up front rather than assuming the budget will hold exactly as drawn.

Illustrative only. Figures are examples used to show the arithmetic and are not a quote, lock, offer, or commitment to lend; binding figures appear on your Loan Estimate.

How this applies in Florida and Colorado

Florida. In Florida, construction lending has to account for wind-borne debris and flood-zone building requirements that affect both cost and timeline, particularly in coastal counties where updated wind-mitigation construction standards apply. Builders unfamiliar with a specific county’s permitting office are a common source of delay, so verifying the contractor’s track record in that jurisdiction specifically is worth confirming before the contract is signed.

Colorado. In Colorado, construction timelines are shaped by elevation, snow load, and wildfire-mitigation building codes that vary by county and can extend both permitting and inspection schedules in mountain jurisdictions. Seasonal weather windows also matter: a project that breaks ground late in the building season may face a longer draw schedule than one started earlier, which affects how much contingency reserve is prudent.

Simply Approved Mortgages LLC arranges residential mortgage loans in Florida and Colorado, so the two applications above are the ones we can act on for a consumer file. Business-purpose loan products may be arranged in additional states only where permitted by applicable law and pursuant to applicable licensing requirements or exemptions.

How a construction-to-permanent loan typically proceeds

The order below reflects how draws and inspections are sequenced on most one-time-close structures.

1. Select and qualify the builder. Confirm license, insurance, and completed-project history before signing a construction contract.
2. Finalize plans, specifications, and the contract price. The appraisal and loan sizing are based on these documents, so they need to be complete before applying.
3. Apply and receive underwriting approval. Income, credit, and the builder’s qualification are reviewed together.
4. Close on the construction loan. On a one-time-close structure, permanent terms are set at this closing.
5. Draws release against inspected progress. Each stage of construction is inspected before the corresponding funds are disbursed.
6. Manage change orders through the contingency reserve. Cost overruns are absorbed by the reserve rather than triggering a new approval when possible.
7. Final inspection and certificate of occupancy. Completion is verified before the loan converts to permanent status.
8. Conversion to permanent payment. On a one-time-close loan, the permanent amortization begins without a second closing.

Mistakes that cost people money on this

• Signing a construction contract before the builder is qualified by the lender.
• Underestimating the contingency reserve needed for change orders.
• Assuming a two-close structure will not require requalifying at the second closing.
• Not confirming the builder’s permitting history in the specific jurisdiction.
• Scheduling draw requests without coordinating the required inspection first.
• Ignoring how carrying two housing costs during the build affects qualifying.
• Choosing plans and specifications that exceed what comparable completed sales in the area support.
• Overlooking flood zone or wind-mitigation construction requirements that add cost.

Is this the right move for your situation?

The honest answer depends on the file. These are the patterns we see on both sides.

Usually a good fit when

• You have a qualified, licensed builder with a documented completion history.
• Plans and specifications are finalized and supported by comparable completed sales.
• You have reserves beyond the contracted price to absorb a reasonable change order.
• You want the certainty of locking permanent terms before construction begins.

Usually not the right move when

• The builder has not been vetted or lacks a track record in the jurisdiction.
• The budget has no contingency built in for overruns.
• Plans are not finalized enough to support a reliable appraisal.
• You would struggle to carry a current housing payment during the build period.

None of this is a determination about your file. A Simply Approved Mortgages Loan Officer can run your actual numbers and show you what your disclosures would say.