Building a custom home from the ground up is one of the biggest financial commitments you will ever make. Most people are comfortable with a traditional mortgage, but construction financing works differently. Understanding the structure before you start talking to builders or lenders puts you in a much stronger position. Here is what you need to know.
What Is a Construction Loan?
A construction loan is a short-term loan that funds your home while it is being built. Instead of receiving a lump sum at closing like a standard mortgage, the lender releases money in stages called draws as work is completed. Your lender will typically require an inspection before each draw to verify that the work is done and the funds are being used correctly. You pay interest only on what has been drawn, not the full loan amount, which helps keep carrying costs lower during the build.
Construction-to-Permanent vs. Stand-Alone Loans
There are two main structures. A construction-to-permanent loan, sometimes called a one-time close or OTC loan, automatically converts to a traditional mortgage when construction is complete. One closing, one set of closing costs, and your rate is locked upfront. A stand-alone construction loan requires two separate closings: one to fund the build and a second to secure your permanent mortgage at the end. OTC loans are simpler for most buyers. Stand-alone loans can make sense if you expect rates to move in your favor before the permanent close, but they carry more risk and more paperwork. Talk to a lender who regularly handles new construction before deciding which route fits your situation.
What Lenders Look For
Construction loans are harder to qualify for than a standard purchase mortgage. Plan on a larger down payment, typically 20 to 25 percent. Lenders also want strong credit, usually 680 or better, and thorough documentation of the project. That means a signed contract with your general contractor, a complete set of plans and specifications, a schedule of values, and a draw schedule. Having a licensed, experienced builder matters here. Lenders are more comfortable when a professional is managing the money and the timeline. A builder who cannot produce organized documentation is a red flag before the first shovel goes in the ground.
How the Draw Process Works in Practice
Once the loan is funded, your builder submits a draw request as each phase of work wraps up. The lender sends an inspector, confirms the work, and releases the funds. Your builder pays subcontractors and suppliers from those funds. Draws need to move on time to keep the project moving. A disorganized builder who cannot get a draw approved on schedule is the fastest way to stall a job and watch your costs climb. At JCG Build, we manage draw documentation closely so our clients are never waiting on paperwork to keep their build on track.
Final Thoughts
Construction financing is straightforward once you understand how it is structured, but it requires more preparation than buying an existing home. Start the lender conversation early, pick someone with real new-construction experience, and make sure your builder knows the draw process inside and out. The right team on both sides makes the whole thing run the way it should.
Call us at (770) 291-4555 or visit JCGbuild.com.
