Construction Loans Made Simple: How to Finance Your Custom Home Project | A BuildLabs Guide

Custom Home Construction Loans Guide

Financing a custom-built home is not like buying a move-in-ready house. It’s a different process altogether. This is a driving reason behind BuildLabs’ transparent pricing model.

We’re also here to serve as a resource and break down the basics of how construction loans typically work.

If a traditional mortgage is like driving across a finished bridge, a construction loan is like building the bridge as you go. Construction loans match the pace and phases of building, bridging the financing gap between blueprints and a finished home. They are complex financial tools, and getting a construction loan requires more planning.

At BuildLabs, we help clients navigate this process every day. Whether you're restoring an historic gem or building a brand-new custom home, understanding your financing options is key to building smarter – and moving in faster. BuildLabs approach is centered on transparency and typically follows a clear and detailed payment schedule, giving clients a sense of the process before we ever break ground.

No matter who you build with, having a clear understanding of how construction loans generally work is empowering knowledge for any homeowner or end user.

This guide below breaks down the types of construction loans, how they work, what lenders look for, and how to position yourself for approval so you can build smarter and move in sooner.

What is a Construction Loan? 

Construction loans work differently from regular home loans. A traditional mortgage gives you all the money upfront to buy a finished home, which is slowly paid back over many years.

By contrast, a construction loan is short-term financing for building or renovating a home. Funds are released in stages, or “draws,” as work progresses and is approved by an inspector. You usually make interest-only payments during construction, then either pay off the loan or convert it to a traditional mortgage.

Types of Construction Loans

Not all construction loans are alike. Depending on your project type, timeline, and financing needs, certain options may suit you better than others. Here’s a quick look at the three main types and when they make sense:

1. Stand-Alone Construction Loan

This type covers only the build (typically 6 - 24 months) and is paid off once construction is complete, either by selling the property, refinancing, or converting to a traditional mortgage. 

Best for: Investors or those planning to sell post-construction. 

Pros: 

• Interest-only payments during construction free up cash flow
• Flexible structure for short-term ownership

Cons: 

• Two sets of closing costs (construction + mortgage)
• Higher risk if plans to refinance or sell fall through

2. Construction-to-Permanent (“C2P”) Loan

Also called “one-step” or “single-close” loans, this type rolls construction and long-term financing into a single loan. You’ll make interest-only payments while building, then transition automatically to a standard mortgage when the home is ready. 

Best for: Homeowners building a custom home to live in.

Pros:

• One closing means fewer fees
• Locks in your mortgage rate early
• Smooth shift from build to mortgage

Cons:

• Stricter upfront requirements
• Must use a licensed builder and provide full plans

3. Renovation Loan

These loans are for upgrading and adding to an existing property, not for building new. You can borrow based on your home's current equity, or its future value post-renovation. 

Common options include: 

• FHA 203(k) – Add up to $35K to your mortgage for repairs
• Fannie Mae HomeStyle®  – Buy and renovate with one loan, ideal for buying fixer-uppers
• Cash-out Refinance and Home Equity Lines of Credit (HELOC) – Tap into existing equity, either by replacing your existing mortgage or on demand through a flexible line of credit. 

Best for: Homeowners updating or restoring a home.

Pros:

• Combine purchase + renovation into one loan
• More control over your timeline and spending
  

Cons:

• Not ideal for full rebuilds or ground-up construction
• Requires more budgeting discipline

How Much Does a Construction Loan Cost? 

Construction loans are typically more expensive than traditional mortgages due to their short-term nature and added risk for lenders. 

Here’s a breakdown of the typical costs involved: 

• Interest Rates – Market conditions, borrower’s financial profile, project location, lender terms, and loan-to-value (LTV) ratio all influence interest rates, which currently range from 6.5% to 11.5% depending on the lender. Borrower pays interest-only during the build, based on funds drawn (not the full loan amount) until the home is done. 
• Origination Fee – Lenders charge this fee to process the loan, typically 1.5 to 2% of the total loan amount. 
• Down Payment – Construction loans require a larger upfront investment than traditional mortgages. Depending on general market conditions, project details, and the borrower’s financial position, lenders may request anywhere from 10% to 40% of the total project cost.
• Closing Costs – Covers a range of services, potentially adding several thousand dollars to your upfront costs. These include: appraisal fees, title insurance, legal & escrow fees, credit report fees, and builders' risk or home insurance. 
• Realtor Fees – Though not technically a part of the construction loan, expect to pay a percentage of the land price in realtor fees if you're purchasing the land or later selling the completed home through a real estate agent. 

Want to estimate your build? These tools and resources can help:

• Construction Loan Calculator – Estimate your monthly payments, total interest, and loan costs based on different scenarios.
• Best Construction Loan Lenders – Compare top-rated lenders and their terms to find a loan that fits your project.
• Construction Loan Requirements – Get a detailed overview of the documentation and qualifications most lenders will expect.

How to Get a Construction Loan

Securing a construction loan requires more than a traditional mortgage, but with the right lender and a solid plan, it can be a smooth process. 

1. Choose the Right Lender

Not every lender offers construction loans, and those that do may specialize in different types, such as custom builds, renovations, or builder-financed developments. Ask your builder for recommendations and look for local, experienced lenders that provide in-house underwriting, transparent draw schedules, fast inspections, and one-time close options. Shop around and keep in mind that regional banks and credit unions may offer greater flexibility and more competitive rates. 

2. Know What Lenders Want

Because construction loans involve more risk than traditional mortgages, lenders take a deeper dive into a project’s details and your finances. Here's what they’re looking for:

From You (the Borrower):

• Creditworthiness – A strong credit score (typically 680 or higher) and a low debt-to-income ratio.
• Income & Assets – Reliable income and sufficient reserves to cover unforeseen costs.
• Strong Down Payment – Since the home doesn’t yet exist, there’s no immediate collateral. A strong down payment signals a serious commitment and serves as built-in equity. It also helps offset the lender’s risk in case the project stalls or falls through.

From the Project:

• Construction Plan – A full set of building plans, a detailed timeline, and a line-item budget.
• Property Documentation – Proof of land ownership or an executed purchase agreement.
• Builder Credentials – A signed agreement with a licensed, insured contractor
• Appraisal – An independent appraisal based on the projected value of the completed home.

3. Tips for Getting Approved

Getting approved for a construction loan is all about preparation and clarity. Here’s how to strengthen your application: 

• Work with an experienced builder with a track record of timely, completed projects.
• Don’t underestimate the costs. Build in a contingency plan, roughly 5-10% of the total budget.
• Be organized. Gather all relevant documentation in one, easy-to-access place. 
• Maintain stable finances. Avoid large purchases or job changes ahead of and during construction. 
• Communicate frequently with your builder and lender to stay aligned on timelines. 

While it takes more effort upfront, a construction loan gives you the freedom to build your ideal home. With trusted lenders and skilled builders, the process can run smoothly from start to finish.

Expanding Financing for Modern Methods of Home Building

Today’s custom homes aren’t built like they used to – they’re smarter, greener, and more efficient. Innovative design-build firms like BuildLabs are leading the way with precision, factory-built homes that prioritize bespoke design and sustainability.

Financing is catching up. Programs like Fannie Mae’s MH Advantage® and Freddie Mac’s CHOICEHome® now offer traditional financing terms for high-performing factory-built homes. And with added support from government grants, subsidies,  FHA’s Energy Efficient Mortgage (EEM), sustainable design is becoming more accessible and affordable.  

The result? More financing options, greater access to capital, and beautifully designed homes built for the future.

Final Thoughts 

Construction loans unlock the freedom to build your vision from the ground up, on your timeline and terms. But they also take more planning, paperwork, and precision. 

By understanding how these loans work, and working with a builder and lender you trust, you can navigate the process with confidence.

BuildLabs partners with trusted lenders to make construction financing easier for our clients. Whether you're restoring, renovating, or building your custom dream home, we’re here to help. 

Ready to explore your options? Contact us today and let’s build something great.