Financing a new construction home works differently than buying an existing property—lenders evaluate the builder's reputation, construction timelines, and phase-based disbursement rather than a finished structure. Understanding your financing options upfront prevents costly delays and helps you lock in favorable terms before prices rise. Here's what you need to know to navigate the process.
Construction Loans vs. Traditional Mortgages
A construction loan is a short-term, interest-only loan that covers the building phase, typically 12–24 months. You only pay interest on the amount drawn down as construction progresses, not the full loan balance. Once the home is complete, you refinance into a permanent mortgage—or if the builder offers it, a one-time "construction-to-permanent" loan that converts automatically.
Traditional mortgages don't work during construction because the house doesn't exist yet to appraise. Lenders need proof of a solid builder track record, detailed blueprints, and a realistic completion timeline before approving funds.
Builder-Offered Financing and Incentives
Many production builders (those building 50+ homes annually) partner with specific lenders or offer in-house financing incentives. These often include:
- Temporary buydown rates: 2/1 or 3/2 programs that lower your first-year mortgage rate by 2–3%, then step up annually
- Closing cost assistance: Builders may cover 1–3% of closing costs ($3,000–$15,000+ depending on purchase price)
- Rate locks: Guaranteed rates locked during construction, protecting you if rates rise
Check with your builder's preferred lender first—they often move faster on new construction approvals and may offer exclusive incentives unavailable elsewhere.
Bank vs. Non-Bank Lenders
Banks (Wells Fargo, Chase, Bank of America) offer competitive rates and lower fees but move slowly on construction loans; approval timelines run 60–90 days.
Non-bank lenders (mortgage companies, credit unions, specialized construction lenders) typically close faster (30–45 days) and show more flexibility with builder partnerships. They may charge slightly higher rates (0.25–0.5%) to offset faster turnarounds.
Online lenders now offer construction-to-permanent loans with no appraisal requirement until completion, streamlining the process significantly.
Compare at least three lenders—construction loan rates vary widely, and a 0.5% difference saves you $100+ monthly.
What Lenders Evaluate
Construction lenders examine different factors than mortgage lenders:
- Builder credentials: License status, complaint history with state regulators, previous project completion rates
- Loan-to-value (LTV) ratio: Most lenders cap construction loans at 80–85% LTV; you'll need 15–20% down payment
- Your credit and income: Minimum 620 credit score; DTI (debt-to-income) capped at 43–50%
- Draw schedule: How and when the builder receives funds as milestones are completed (foundation, framing, electrical rough-in, drywall, final inspection)
Timeline and Closing Costs
Timeline: Pre-approval takes 2–4 weeks, final approval post-completion takes another 30 days. Plan financing 60–90 days before your desired closing date.
Closing costs: Construction loan closings run $2,000–$4,000 (higher than standard mortgages because of inspections and multiple disbursement cycles). Some builders cover this via incentives.
Key Steps to Take Now
- Get pre-approved for a construction loan before selecting a builder—it strengthens your offer
- Request the builder's preferred lender list and compare against independent quotes
- Ask for the draw schedule and inspect the lender's contingencies (what stops payment if construction pauses)
- Lock your rate for at least 120 days to protect against rate increases during construction
- Review the builder's warranty and insurance—they should carry builder's risk insurance that protects you during construction
Services like Mercoly help you compare and connect with trusted new construction lenders and builders in your market, saving hours of individual outreach.
Frequently Asked Questions
Q: Can I get approved for a construction loan if the builder hasn't started yet? A: Yes—most lenders pre-approve based on your financials and the builder's credentials, but final approval happens once the builder pulls permits and submits the draw schedule.
Q: What happens if the builder goes bankrupt mid-construction? A: Your lender holds a deed of trust; they'll hire another contractor to finish or pay out claims. Builder's insurance and your down payment protect you, though timelines extend significantly.
Q: Do construction loan rates differ from permanent mortgage rates? A: Yes—construction rates typically run 0.25–0.75% higher because of short-term risk, but one-time construction-to-permanent locks let you set permanent rates upfront.
Start comparing construction financing options today to lock in the best rates and timelines for your new build.