How Construction Loans Work
A construction loan is a short-term loan that funds the building of a new home. Unlike a standard mortgage where you receive the full loan amount at closing, a construction loan releases funds in stages called draws. Each draw pays for a completed phase of construction.
Draw schedule. The lender and builder agree on a draw schedule before construction begins. Common milestones include foundation completion, framing, roofing, mechanical systems (HVAC, plumbing, electrical), drywall, and final completion. After each milestone, an inspector verifies the work, and the lender releases the next draw.
Interest-only during construction. During the build phase, you make interest-only payments on the amount that has been drawn. If $100,000 of a $400,000 loan has been drawn, you pay interest on $100,000. As more draws are released, your monthly payment increases gradually.
Conversion to permanent mortgage. Once the home receives a certificate of occupancy, the construction loan converts to a standard permanent mortgage (or you close on a new permanent mortgage, depending on the program). You then begin making regular principal and interest payments.
One-Time Close vs Two-Time Close
There are two main construction loan structures. The choice affects your costs, timeline, and rate lock options.
One-Time Close (Single Close)
One closing: You close once before construction begins. The loan covers the lot purchase (if applicable), construction costs, and permanent mortgage.
One appraisal: Based on the plans and specifications for the completed home.
Rate lock: Your permanent mortgage rate is typically locked at closing, protecting you from rate increases during the build.
Lower total costs: One set of closing costs instead of two.
Best for: Borrowers who want simplicity and rate protection.
Two-Time Close (Two Separate Loans)
Two closings: You close on a construction loan first, then close on a separate permanent mortgage when the home is complete.
Two appraisals: One before construction and one after completion.
Rate flexibility: You lock the permanent mortgage rate when construction is nearly complete, which can work in your favor if rates drop during the build.
Higher total costs: Two sets of closing costs, two appraisals, two rounds of title work.
Best for: Borrowers who believe rates may drop during construction and want to shop for the best permanent rate at completion.
Construction Loan Requirements
Borrower Requirements
Credit score: 680 minimum for most programs. Some lenders require 700+. FHA construction loans accept 580+ with 3.5% down.
Down payment: 20% to 25% for conventional construction loans. FHA construction loans require 3.5%. VA construction loans may offer 0% down for eligible veterans.
Reserves: Most lenders want 6 to 12 months of mortgage payment reserves in savings after closing.
Debt-to-income ratio: Typically 43% to 45% maximum, calculated on the permanent mortgage payment.
What You Need From Your Builder
The lender underwrites the builder almost as carefully as the borrower. Your builder needs to provide documentation that proves they can complete the project.
Licensed and insured. A valid general contractor license in Texas and current liability insurance. Most lenders require a minimum of $1 million in liability coverage.
Financial statements. Lenders may request the builder's financial statements or proof of bonding to confirm they have the financial capacity to complete the project.
Project timeline. A detailed construction timeline showing start date, milestone dates, and estimated completion date.
Draw schedule agreement. The builder must agree to the lender's draw schedule and inspection process. Draws are released after inspections confirm each phase is complete.
Track record. Most lenders prefer builders with at least 2 to 3 years of experience and completed projects they can reference.
Hot Construction Markets in Houston
New construction is booming in several areas around Houston, driven by master-planned communities and available land.
Fulshear. One of the fastest-growing communities west of Houston. Master-planned developments like Cross Creek Ranch and Fulbrook on Fulshear Creek offer new construction from the $300s to over $1 million. See: Fulshear Mortgage.
Brookshire. Just west of Katy along I-10. Newer developments with larger lots and lower price points than closer-in suburbs. See: Brookshire Mortgage.
Conroe. North of Houston along I-45. Rapid growth with new master-planned communities and custom home builders on acreage. See: Conroe Mortgage.
Tomball. Northwest Houston with a mix of master-planned communities and custom lot builds. Strong school districts driving demand. See: Tomball Mortgage.
Construction-to-Permanent Timeline
Here is a month-by-month overview of a typical construction loan process in the Houston area.
Typical Timeline
Months 1-2: Pre-approval and planning. Get pre-approved for a construction loan. Finalize house plans, select a builder, and get detailed bids. The lender reviews builder qualifications.
Month 3: Loan application and appraisal. Submit the full loan application with plans, specs, and builder documentation. The appraiser values the home based on the completed plans (as-built appraisal).
Month 4: Closing. Close on the construction loan. For a one-time close, this is the only closing. Land purchase funds are released if applicable.
Months 5-7: Foundation and framing. Permits pulled, site prep, foundation poured, framing begins. First draws released after inspections.
Months 8-10: Mechanical and interior. HVAC, plumbing, electrical rough-in. Drywall, painting, flooring, cabinets, countertops. Additional draws released.
Months 11-12: Completion. Final finishes, landscaping, driveway, final inspections. Certificate of occupancy issued.
Month 12-13: Conversion. Construction loan converts to permanent mortgage. For a two-time close, this is the second closing.
Cost Considerations
Land cost. If you do not already own the lot, this is a separate cost. Lot prices in the Houston metro range from $50,000 to $300,000 or more depending on location, size, and whether the lot is in a developed subdivision with utilities.
Construction cost per square foot. In the Houston area, new construction costs typically range from $150 to $250 per square foot depending on the level of finishes, custom features, and builder. A 2,500 square foot home at $175 per square foot has a construction cost of $437,500 before land.
Permits and fees. Building permits, impact fees, utility connection fees, and HOA architectural review fees (if applicable). Budget $5,000 to $15,000 depending on the jurisdiction.
Contingency budget. Plan for 10% to 15% above the construction contract price for unexpected costs, change orders, and material price increases. If the contract is $400,000, set aside $40,000 to $60,000 in contingency.
Frequently Asked Questions
Can I get a lot loan separately and then a construction loan?
Yes. You can purchase the land first with a lot loan, then apply for a construction loan once you have plans and a builder. One-time close construction loans can also include the lot purchase. If you already own the lot free and clear, that equity can count toward your down payment.
Can I use a construction loan for a major renovation?
Construction loans are for ground-up new builds. For major renovations on an existing home, an FHA 203(k) loan or renovation loan is a better fit. See: FHA 203(k) Renovation Loans Houston.
Does FHA offer construction loans?
Yes. FHA offers a one-time close construction-to-permanent loan with 3.5% down at 580+ credit. The builder must be FHA-approved. This is one of the lowest down payment construction options available. For more on FHA programs: FHA Loans Houston.
How long does construction take?
Most new construction homes in Houston take 6 to 12 months. Construction loans have a built-in construction period, usually 12 months. If the build runs over, the lender may grant an extension with additional fees. Build a contingency timeline into your project plan.
Can I lock my rate during construction?
With a one-time close loan, your permanent rate is typically locked at closing before construction begins. With a two-time close, you lock the permanent rate when construction is nearly complete. Rate lock policies vary by lender.
Can I be my own builder?
Owner-builder programs exist but are rare. They typically require 25% or more down, proof of construction experience, and detailed project management plans. Most programs require a licensed general contractor.
Get Pre-Approved for Construction Financing
Brandon works with lenders who specialize in construction loans for the Houston metro area. Whether you are building in a master-planned community or on your own lot, he matches you with the right program and walks you through the draw process from first shovel to certificate of occupancy.
Related Resources
- FHA 203(k) Renovation Loans Houston - For renovating an existing home
- Conventional Loans Houston - Standard purchase programs
- FHA Loans Houston - Low down payment options including FHA construction
- VA Loans Houston - Zero down for eligible veterans
- Mortgage Pre-Approval Houston - Start the process today
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