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Building a custom home requires specialized financing that works differently from a standard home purchase mortgage. A construction-to-permanent (CTP) loan covers both the building phase and the long-term mortgage in a single product. Understanding how these loans work — the draw process, rate structure, and qualification requirements — is essential before breaking ground on a new build.

One-Time Close vs. Two-Time Close

One-time close (OTC) construction loans combine the construction and permanent financing into a single closing. You lock your permanent rate upfront, go through one application and one set of closing costs, and the loan automatically converts to a permanent mortgage when construction is complete. Two-time close loans involve separate closings for the construction phase and the permanent mortgage. You close on the construction loan first, then refinance into a permanent mortgage when the home is finished. Two-time close gives you flexibility to shop rates again before the permanent phase, but involves double closing costs and the risk that rates may be higher when you refinance.

How the Draw Process Works

During construction, you do not receive the full loan amount at once. Instead, funds are disbursed in draws as construction milestones are reached. A typical draw schedule has 4-6 stages: foundation, framing, mechanical (plumbing, electrical, HVAC), drywall and interior finishes, and final completion. Before each draw, the lender sends an inspector to verify the work has been completed. The builder submits a draw request, the lender verifies and releases funds, and the builder continues. During construction, you typically make interest-only payments on the amount drawn, not the full loan amount.

Rates and Costs

Construction loan rates are typically 0.5-1.0% higher than standard mortgage rates during the construction phase. With a one-time close, your permanent rate is locked at closing and is usually slightly above current market rates to account for the extended lock period (construction takes 8-14 months on average). Two-time close construction rates float during building, and you lock the permanent rate near completion. Closing costs are higher than a standard purchase: expect appraisal fees for both the lot and the construction plans, builder review fees, inspection fees for each draw, and potentially higher origination fees. One-time close saves money by avoiding duplicate costs.

Qualification Requirements

Construction loans have stricter requirements than standard mortgages. Minimum credit scores are typically 680-700. Down payments start at 5% for some programs but 10-20% is more common. The builder must be licensed, insured, and approved by the lender — most lenders will not work with owner-builders or unlicensed contractors. You will need complete construction plans, a detailed budget, a building timeline, and a signed construction contract. The appraisal is based on plans and specifications for the projected completed value. DTI requirements are similar to conventional loans (45% maximum), and income must be fully documented.

Land Considerations

If you already own the land, its equity can serve as your down payment. If you need to purchase the lot, some construction loans include the land cost. Others require you to own the land before the construction loan closes. Land equity is calculated based on either the original purchase price or the current appraised value, whichever is lower, unless you have owned the land for more than 12 months (in which case the appraised value is used). If you are buying land separately, expect a higher down payment (20-50%) and a shorter loan term (2-5 years) for a raw land loan. Improved lots with utilities and road access are easier to finance than raw land.

Common Challenges and Tips

Construction delays are common — pad your timeline by at least 2-3 months. Cost overruns happen more often than not, so include a 10-15% contingency in your budget. Change orders after construction begins are expensive and can delay your project. Choose a builder with a solid track record and check references, not just the portfolio. Get multiple builder bids before committing. Consider the one-time close option to lock your permanent rate early and avoid the risk of rising rates during construction. Check construction loan options on Rate Direct's /construction tool to compare rates from lenders experienced in construction financing.