How Construction Loans Work
A construction loan finances the building process. You close on the construction loan and the builder begins work. During construction, you don't make monthly mortgage payments. Instead, you pay interest only on the amount that's been drawn so far. The builder requests "draws" as each phase of construction completes: foundation, framing, roof, electrical, plumbing, drywall, final.
Your lender inspects each draw stage to verify work is actually done. Money is released incrementally. You're not writing one check for $400,000 on day one. The draws happen as work happens.
When construction finishes and you get your certificate of occupancy, the construction loan "converts" to a permanent mortgage. At that point, you begin making standard principal and interest payments on the full loan amount.
The entire process typically takes 6 months from closing to conversion.
One-Time Close vs Two-Time Close
One-Time Close
You close once. The construction loan and the permanent mortgage are the same loan. It converts automatically. You pay one set of closing costs (approximately $8,000 to $15,000). Cleaner, simpler, less expensive. Most builders and lenders prefer this.
Two-Time Close
You close on a construction loan, the builder builds, then you close again on a separate permanent mortgage. Two closings, two sets of closing costs (approximately $16,000 to $30,000 total). More expensive. More flexible if you want to shop for different terms when construction is done. Fewer lenders offer this anymore.
Recommendation: One-time close. Save $5,000 to $12,000 in closing costs. The permanent terms are locked from day one, so you know exactly where you'll land.
Requirements for Construction Loans
Borrower Requirements
Credit score: 680+ for most lenders. Some will go to 640+ with compensating factors.
Down payment: 20 to 25% is standard. Some construction lenders will do 15% with strong income and credit.
Approved builder: The builder must be licensed, insured, and have a history of completed projects. Your lender will verify this.
Plans and detailed budget: The builder provides architectural plans and an itemized budget showing every cost category. Your lender reviews this to ensure the budget is realistic for a construction loan.
Appraisal based on as-completed value: The appraisal is for the finished home, not the current land condition. Lenders loan based on the completed value, not the land value alone.
What You Need From Your Builder
Licensed and insured. Verify your builder holds a general contractor license in Texas and carries liability insurance of at least $1 million. Check the license status at the TDLR (Texas Department of Licensing and Regulation) website.
Proven financials. Ask for bank references and previous lender references. Has the builder successfully completed other projects and paid suppliers?
Realistic timeline. Construction always takes longer than expected. Get a month-by-month timeline and ask what could delay it: weather, supply chain, labor.
Draw schedule agreement. Your lender and the builder must agree on how draws are requested and inspected. This is non-negotiable.
Hot Houston Construction Markets
Houston is growing faster than almost any major metro in America. The new home markets are booming.
Fulshear: 210% population growth over the past decade. New master-planned communities filling up. Median lot prices rising. Bridgeland and Bonterra are the flagship communities drawing buyers from all over Houston.
Brookshire: West of Fulshear, 198% jump in transactions. More affordable than Fulshear but still in the growth corridor. Closer to I-10 and Highway 290. Realistic commute to downtown, the Medical Center, or Energy Corridor.
Conroe: North, 40 minutes from downtown. Master-planned communities like Bentwater and Woodforest. Strong job market locally (Exxon, Entergy). Attracting young families who want newer homes.
Tomball corridor: North Houston, 30 minutes to Medical Center, 45 minutes to downtown. The Woodlands, Tomball, Spring: fast-growing, premium pricing but consistent appreciation. Highly rated schools.
What's driving growth here: no state income tax, strong job market, affordable land compared to coastal metros, strong schools, young demographic influx.
Construction-to-Permanent Timeline
Month-by-Month Timeline
Month 1: You close on the construction loan and appoint the builder. Builder orders materials and prepares the site.
Month 2: Foundation is poured. First draw requested. Lender inspects and releases funds.
Month 3: Framing is complete. Second draw. Inspection.
Month 4: Roof and mechanicals (HVAC, plumbing, electrical rough-in). Third and fourth draws.
Month 5: Drywall, interior finishes, final mechanicals. Fifth and sixth draws.
Month 6: Paint, flooring, fixtures, final walkthrough. Final draw released. Certificate of occupancy issued. Construction loan converts to permanent mortgage. You start making regular monthly payments.
Some projects finish faster. Most take 7 to 9 months. Weather delays (heavy rain, extreme heat), supply chain hiccups, labor shortages: all push the timeline out.
Cost Considerations
Land cost: If you're buying the lot separately, factor this in. Houston lots range from $30,000 to $150,000 depending on location and size.
Construction cost per square foot: Houston averages $150 to $250 per square foot for new construction. A 2,500 sq ft home costs $375,000 to $625,000 just for the build (not including land or finishes).
Permits and impact fees: City of Houston charges permit fees based on construction cost (roughly 0.5 to 1% of build cost). Suburban areas may charge additional impact fees for utilities and infrastructure. Budget $3,000 to $8,000.
Contingency fund: Always hold back 10 to 15% of your construction budget for unknowns. Change orders happen. Soil conditions surprise you. Better to have the cash available.
Total Example
Lot: $200,000.
Build: $400,000.
Permits/fees: $20,000.
Contingency (10%): $40,000.
Total project cost: $660,000.
Down payment at 20%: $132,000.
Construction loan: $528,000.
Frequently Asked Questions
Can I get a separate lot loan before closing on construction financing?
Yes. Some builders and lenders offer lot loans that bridge the gap between purchasing land and starting construction. This is useful if you're buying land now but building later.
What's the difference between renovation loans and new construction loans?
Construction loans are for new builds on raw land. Renovation loans (like FHA 203(k)) are for fixing up an existing home you're buying. Different products, different timelines, different costs.
Is FHA construction financing available?
Yes, FHA 203(b) loans include construction-to-permanent financing. FHA loans are 3.5% down instead of 20%, but come with mortgage insurance. FHA construction lending is less common but available through specialty lenders. See: FHA Loans Houston.
Can I lock my rate during construction?
Yes. Most lenders offer a rate lock for the permanent mortgage portion. The lock is typically 120 to 180 days, which covers most construction timelines. If construction runs longer, extension fees apply.
Can I build as the owner-builder without a licensed general contractor?
No. Texas law and lender requirements both mandate a licensed general contractor supervise the project. This is for everyone's protection.
What if the builder goes out of business during construction?
This is a real risk. Your lender's construction inspection process protects you somewhat, as draws are released for completed work. But work can stop. Insurance requirements and builder licensing help mitigate this. Choose a builder with a strong track record and multiple completed projects.
Build Your Houston Home With Confidence
New construction in Houston's growth markets is a solid strategy for building equity and getting exactly what you want. Construction loans make it possible. Understanding the timeline, the costs, and the process removes the mystery and lets you move forward confidently.
Brandon works with builders and construction lenders across Houston's hottest markets: Fulshear, Brookshire, Conroe, Tomball, and beyond. He structures your construction loan for efficiency, explains every draw stage, and coordinates the conversion to your permanent mortgage. You'll know exactly when money draws, what each phase costs, and when you get your keys.
Related Resources
- Conventional Loans Houston - Permanent mortgage options
- FHA Loans Houston - FHA construction-to-permanent financing
- VA Loans Houston - VA construction loan programs
- Mortgage Pre-Approval Houston - Get pre-approved before you build
- Houston Housing Market - Market trends and growth areas
Ready to Build Your Houston Home
Construction loans for new builds in Houston and surrounding areas. One-time close and two-time close options. Brandon guides you from pre-approval through certificate of occupancy. Free consultation, no obligation.
Talk to Brandon About Construction Financing