Worked example: A Virginia buyer purchases an $85,000 lot and builds a $435,000 home, for a total project cost of $520,000. With 10% down, the construction loan is $468,000. At a sample 7.25% construction rate, an initial $125,000 draw balance creates an interest-only payment of $755.21 per month. Once the home is complete and the balance converts to a 30-year fixed loan at 6.625%, principal and interest is about $2,996 per month. That is a monthly increase of $2,240.79, and over the first five years, scheduled principal reduction is roughly $29,000 before taxes, insurance, or HOA dues.
That gap between the first payment and the finished-home payment is why understanding how construction loans work matters before choosing plans, a builder, or a homesite. A construction loan is not simply a mortgage with a longer closing timeline. It is a controlled financing process that releases money in stages, verifies work along the way, and often converts into permanent financing after the certificate of occupancy is issued.
By Duane Buziak, NMLS #1110647
Table of Contents
- What a construction loan finances
- How draws, inspections, and payments work
- One-time close versus two-time close financing
- Credit, reserves, and builder approval
- Virginia pricing and market considerations
- Construction loan FAQs
What a construction loan actually finances
A construction loan can finance the lot, site preparation, permits, foundation, materials, labor, builder draws, and a contingency reserve. The exact budget is documented before closing. Your broker and the construction administrator review the signed builder contract, specifications, plans, appraisal, title work, and construction schedule to make sure the project is financeable.
The appraisal is based primarily on the home’s expected value after completion, not just the vacant lot’s current value. If the finished value supports the loan amount and the project budget is realistic, the financing can move forward. If costs rise after closing, the contingency reserve may help, but it is not unlimited. Upgrades added mid-build can require cash from the buyer or a revised approval.
For perspective, the 2025 baseline conforming loan limit was $806,500 for a one-unit home, while higher-cost Virginia areas can have higher limits. That gives many buyers room to build with conventional financing, but larger projects in places such as Short Pump, Glen Allen, Charlottesville, and parts of Prince William County may move into jumbo territory depending on lot cost and finished value.
How construction loans work from closing to completion
At closing, the money does not arrive in one large check for the builder. It is held in a controlled account and released through draws. A builder may request a draw after completing the foundation, framing, mechanical work, drywall, cabinetry, or another milestone listed in the draw schedule. An inspection confirms that the work matches the request before funds are released.
During construction, borrowers generally pay interest only on the amount drawn, not on the full approved loan amount. That keeps early payments lower, but they rise as construction progresses. A 12-month build with a $468,000 final balance will not carry the same payment every month. The timing of draws, weather delays, permit issues, and material availability all affect the payment path.
A typical build period is 9 to 12 months, although custom homes and complex site work can take longer. In Chesterfield County, Henrico County, and Goochland County, buyers should plan for the possibility that grading, well, septic, utility, or permit timelines push beyond the builder’s original estimate. Construction financing works best when the budget has breathing room rather than relying on every dollar arriving exactly on schedule.
One-time close versus two-time close
A one-time-close construction loan combines the construction phase and permanent mortgage into one closing. The permanent financing terms are set before construction begins, subject to program rules. This can reduce duplicate fees and protects the buyer from needing to requalify at completion solely because market rates changed.
A two-time-close structure uses one closing for construction and another for permanent financing. It can offer flexibility if a borrower expects materially stronger income, credit, or equity by the time the home is finished. The trade-off is that the buyer may face a second set of closing costs, a new appraisal, and rate uncertainty at conversion.
| Decision point | Mortgage broker approach | Single-shelf provider approach |
|---|---|---|
| Program access | Can compare eligible conventional, VA, FHA, jumbo, and non-QM construction options. | Limited to its own available construction menu. |
| Typical FICO floors | Options commonly begin around 620 conventional, 580 FHA, and may vary by VA or jumbo profile. | Overlays may require a higher score than the base program allows. |
| Program breadth | Can evaluate bank statement, DSCR, and portfolio-style paths when standard income documentation does not fit. | May have fewer alternatives for self-employed or investor borrowers. |
| Pricing flexibility | Allows comparison of eligible rate, fee, and credit structures across available outlets. | Pricing is tied to one provider’s rate sheet and overlays. |
| Credit review | A soft credit pull mortgage review can help evaluate options before a full application. | Some providers begin with a hard inquiry during pre-approval. |
Credit, cash reserves, and builder approval
Construction financing has more moving parts than a purchase of an existing home, so underwriting is usually more detailed. Conventional borrowers often need at least a 620 FICO score, while stronger pricing frequently starts around 680 to 700. FHA can be an option for qualifying owner-occupants with scores as low as 580, subject to program and broker requirements. Eligible veterans may have VA construction paths, though credit, residual income, builder approval, and project details remain central to approval.
Cash reserves matter. A strong file may show two to six months of total housing payments in reserves after down payment and closing costs. Jumbo construction files can require six to 12 months, especially where the finished payment is high or income is variable. Self-employed buyers should expect tax returns, business statements, and current profit-and-loss documentation. Some non-QM and bank statement options can fit borrowers whose deposits tell a clearer story than taxable income alone.
Builder approval is equally important. The builder generally must provide licensing, insurance, references, a detailed contract, plans, specifications, and a draw schedule. The lowest bid is not always the safest choice. A builder with unclear allowances, vague timelines, or thin contingency planning can create financing problems even when the home design is attractive.
Virginia numbers that should shape your plan
Virginia construction buyers are working in a market where land, labor, and finished-home values vary sharply by region. Realtor.com reported a median listing price around $409,900 for Henrico County in 2025, while higher-demand areas near Charlottesville and Prince William County commonly support materially larger build budgets. In Richmond-area suburbs such as Midlothian and Glen Allen, competition for buildable lots can be more intense than competition for completed homes because suitable lots are limited and utility-ready parcels command a premium.
Closing costs on construction financing commonly fall in the 2% to 5% range of the loan amount, depending on the program, title work, escrows, points, appraisal complexity, and whether the transaction is one-time or two-time close. On the $468,000 example, 2% is $9,360. A preferred title company can save an additional $2,000 on average, bringing that example down to approximately $7,360 before any prepaid items or program-specific charges.
Before a no hard inquiry mortgage pre approval conversation, start with a realistic all-in budget: lot price, contract price, site work, contingency, closing costs, reserves, and the finished payment. A soft pull mortgage broker review can provide a useful first look without a credit hit, then a full application can follow once the builder and property are identified.
Construction Loan FAQs
1. Do I pay the full mortgage payment during construction?
Usually no. You generally pay interest only on the funds already drawn during the construction phase.
2. Can I use land I already own as my down payment?
Often, yes. Existing land equity may count toward required equity, subject to appraisal, title, and program review.
3. How much down payment is needed?
It depends on the program. Some owner-occupied options allow lower down payments, while jumbo and investment scenarios often require more.
4. Can veterans use a VA construction loan?
Eligible veterans may qualify for VA construction financing when the project, builder, credit profile, and occupancy requirements meet program rules.
5. What happens if the builder needs more money?
The contingency reserve may cover eligible overruns. If it does not, the borrower may need to bring cash or reduce the project scope.
6. Does a construction loan require inspections?
Yes. Draw inspections help confirm completed work before construction funds are released.
7. Can self-employed borrowers qualify?
Yes. Conventional, bank statement, and other non-QM options may be reviewed based on the borrower’s complete income profile.
8. Can I start with a mortgage pre approval without hard pull?
Yes. A soft credit review can help estimate eligibility and payment options before a full credit application is submitted.
Build with the payment in mind
The best construction plan is not the largest home a preliminary approval can support. It is the home whose finished payment, reserve position, and project contingency still feel comfortable after the excitement of the design process wears off. Clear communication before the first draw can prevent costly pressure later.
Legal disclaimer: This article is for educational purposes only and is not a commitment to provide financing. Rates, fees, credit requirements, program availability, construction guidelines, and approval terms can change and depend on borrower qualifications, property type, occupancy, appraisal, builder approval, and applicable program rules. Equal Housing Opportunity.
Duane Buziak | Mortgage Maestro | NMLS #1110647 | Coast2Coast Mortgage, LLC NMLS #376205 | Licensed in VA, FL, TN, GA & DC
[Contact] | NoTouch Credit Pull available — no hard inquiry, no credit hit.
