Construction Loans

Can't find the perfect home? Build it. Construction loans finance your new home from the ground up — or turn an existing property into exactly what you want through a major renovation.

Who Is This Loan For?

✅ Buyers who want to build a new home on a lot they own or plan to purchase
✅ Homeowners planning a major renovation or addition
✅ Buyers who can't find what they want in the existing market
✅ Investors building new properties (select programs)
✅ Anyone working with a licensed general contractor on a ground-up build or gut renovation

What Is a Construction Loan?

A construction loan is a short-term loan that finances the building of a new home (or major renovation of an existing one). Unlike a traditional mortgage where you receive the full loan amount at closing, a construction loan is disbursed in stages ("draws") as construction progresses.

Two main types:

🔹 Construction-to-Permanent (One-Time Close)

The most popular option. One loan, one closing, one set of closing costs.

Phase 1 (Construction): You make interest-only payments on the amount drawn so far. Typically 6–12 months.
Phase 2 (Permanent): Once construction is complete, the loan automatically converts to a standard 15 or 30-year mortgage. No second closing, no second set of fees.

This is what most of our clients choose. It's simpler, cheaper, and locks in your permanent rate upfront.

🔹 Construction-Only Loan

A standalone construction loan that must be refinanced into a permanent mortgage after the build is complete.

Two separate closings = two sets of closing costs
Rate risk - your permanent mortgage rate isn't locked until after construction
More flexibility - you can shop for the best permanent mortgage after the build

Best for: Borrowers who want maximum flexibility or plan to sell the property immediately after construction (builders/investors).

At Team Malik, we specialize in construction-to-permanent loans because they save you money and eliminate the risk of rate changes during your build. We work as both a direct lender and broker, giving us access to multiple construction programs. Licensed in Florida, New Jersey, and Pennsylvania.

How Construction Loans Work

Unlike a regular mortgage, construction loans are disbursed in draws - scheduled payments released to your builder as work is completed. Here's how the process flows:

Phase 1: Pre-Construction

You plan, we finance.

Before a single nail is hammered, we approve your loan based on:

Your financial profile (income, credit, assets)
The construction plans and specifications
The builder's qualifications and license
The appraised future value of the completed home (not the current lot value)

Phase 2: Construction (6–12 Months Typical)

Money is released in stages as work progresses.

A typical draw schedule looks like this:

Before each draw is released, an inspector verifies the work is complete for that stage. This protects you from paying for work that hasn't been done.

During construction, you make interest-only payments on the amount drawn so far - not the full loan amount. So in the early stages, your monthly payments are very low.

Example:

Total construction loan: $400,000
After Draw 1 (15%): You're paying interest on $60,000 → ~$375/month
After Draw 3 (50%): You're paying interest on $200,000 → ~$1,250/month
After Draw 6 (100%): You're paying interest on $400,000 → ~$2,500/month

Phase 3: Permanent Mortgage

Construction complete → loan converts automatically.

Once the home passes final inspection and receives a certificate of occupancy, the construction loan converts to a standard mortgage. Your permanent rate was locked at closing (with a one-time close loan), so there are no surprises.

You begin making regular principal + interest payments on your new 15 or 30-year mortgage.

Construction Loan Requirements

Down Payment

Typical: 10–20% of the total project cost (land + construction)
Based on the appraised future value of the completed home
If you already own the land, your equity in the land may count toward the down payment

Credit Score

680+ for most programs
700+ for the best rates and terms
Clean credit history with no recent major derogatory events

Income & Employment

Stable, verifiable income — W-2s, tax returns, pay stubs
2 years of consistent employment in the same field
Self-employed borrowers: 2 years of tax returns
DTI ratio generally below 43–45%

Cash Reserves

6–12 months of mortgage payments in liquid reserves after closing
Construction projects can have unexpected costs — lenders want to see a cushion

Builder Requirements

This is critical. The lender needs to approve your builder:

Licensed general contractor in the state where you're building
Proof of insurance (general liability + builder's risk)
Track record - typically 2+ years of experience and completed projects
Detailed construction contract with fixed pricing and timeline
Plans and specifications - architectural drawings, material lists, etc.

You cannot act as your own general contractor on most construction loan programs. The lender requires a licensed professional.

Property / Land

You can buy the land and build simultaneously (land cost included in the loan)
Or build on land you already own (your equity counts toward down payment)
Land must be in a buildable location with proper zoning and permits
Rural, suburban, and urban lots all qualify

Construction-to-Permanent vs. Construction-Only

Construction Loan vs. Traditional Mortgage

What Can You Build?

Construction loans cover a wide range of projects:

Ground-Up New Construction

Custom single-family homes
Spec homes (for builders/investors)
Townhomes and duplexes
Multi-family (2–4 units, if you occupy one)

Major Renovations

Gut renovations of existing homes
Additions (new rooms, floors, wings)
Tear-down and rebuild on existing lot

What's Typically NOT Covered

Minor cosmetic renovations (for that, consider a cash-out refinance or home equity loan)
Commercial construction (5+ units, retail, office)
Owner-builder projects (you must use a licensed GC)

Real-World Construction Loan Example

Key takeaway: Because they already owned the land, they didn't need any additional cash for the down payment. Their land equity covered it entirely.

The Construction Loan Process

Step 1 — Initial Consultation

We review your financial profile, building plans, and budget. If you haven't selected a builder yet, we can provide guidance on what lenders look for. Takes 30 minutes.

Step 2 — Builder & Plan Review

Submit your builder's credentials, construction contract, plans, and specifications. We verify the builder meets lender requirements and the budget is realistic. Timeline: 1–2 weeks.

Step 3 — Appraisal

A licensed appraiser reviews the plans and estimates the future completed value of the home. This determines your maximum loan amount. Timeline: 1–2 weeks.

Step 4 — Underwriting & Approval

Your financial documents and the construction package are reviewed together. Construction loan underwriting is more detailed than a standard mortgage — but we prepare your file to minimize back-and-forth. Timeline: 2–3 weeks.

Step 5 — Closing

You close on the loan. The first draw is released to begin site work and foundation. Your permanent rate is locked (one-time close). You're officially building your home.

Step 6 — Construction & Draws

As your builder completes each stage, they request a draw. An inspector verifies the work, and funds are released. You make interest-only payments on the drawn amount. Timeline: 6–12 months (varies by project).

Step 7 — Final Inspection & Conversion

The home passes final inspection and receives a certificate of occupancy. The loan automatically converts to your permanent mortgage. You move in and start making regular mortgage payments.

Total timeline from application to move-in: 9–15 months (depending on construction complexity).

Tips for a Smooth Construction Loan Process

1. Choose your builder carefully.

The lender will scrutinize your builder's credentials. Pick a licensed, insured GC with a proven track record and references. A great builder makes the entire process smoother — for you and for us.

2. Get detailed plans and a fixed-price contract.

Vague plans and "cost-plus" contracts make lenders nervous. The more detailed your plans and the more locked-in your pricing, the faster your approval.

3. Build in a contingency budget.

Construction projects almost always have surprises. Most lenders require a 5–10% contingency reserve built into the budget. This protects you from cost overruns derailing the project.

4. Don't make major changes mid-build.

Change orders (modifications to the original plan) can delay draws, increase costs, and complicate the loan. Finalize your design before breaking ground.

5. Stay in communication.

We coordinate between you, your builder, the appraiser, and the inspector throughout the process. The more responsive everyone is, the faster draws are released and the sooner you move in.

Frequently Asked Questions

Can I include the land purchase in the construction loan?

Yes. If you don't already own the land, most construction-to-permanent programs allow you to finance the land purchase and construction in one loan. The land cost is included in the total project budget.

What if I already own the land?

Even better. Your equity in the land counts toward your down payment. In many cases, if you've owned the land long enough and it's appreciated, you may need little to no additional cash for the down payment.

Can I use a construction loan for a renovation?

Yes — for major renovations (gut rehabs, additions, tear-down and rebuild). Minor cosmetic updates (new kitchen, bathroom remodel) are typically better handled with a cash-out refinance or home equity loan. If the renovation involves structural changes, permits, and a general contractor, a construction loan is likely the right fit.

How long does construction typically take?

Most custom homes take 6–12 months to build, depending on size, complexity, weather, and permitting. Larger or more complex projects can take 12–18 months. Your builder will provide a timeline as part of the construction contract.

What happens if construction takes longer than expected?

Construction loans have a built-in construction period (typically 12 months). If your build runs over, we can usually request an extension from the lender. There may be a small fee, but it's manageable. The key is communication - if delays are expected, we address them early.

Do I need to have a builder selected before applying?

Not necessarily. We can start the financial pre-approval process while you're still selecting a builder. However, the builder must be approved before the loan can close. We recommend starting the builder search early.

Can I act as my own general contractor?

Most construction loan programs do not allow owner-builders. The lender requires a licensed, insured general contractor to manage the project. This protects both you and the lender from construction risks.

What if construction costs go over budget?

This is why the contingency reserve exists. If costs exceed the contingency, you may need to cover the difference out of pocket or modify the scope of work. A detailed, fixed-price contract with your builder minimizes this risk.

Can I build on rural land?

Yes, as long as the land has proper zoning, access to utilities (or approved well/septic plans), and is in a buildable location. Rural, suburban, and urban lots all qualify.

What are the interest rates on construction loans?

Construction loan rates are typically 0.5–1% higher than standard mortgage rates during the construction phase. Once the loan converts to a permanent mortgage, you'll have the rate that was locked at closing (one-time close) — which is a standard mortgage rate.

Explore Other Loan Options

FHA Loans → Low down payment and flexible credit. Great for first-time buyers.

DSCR Loans → Qualify on rental income. Built for investors.

Bank Statement Loans → Self-employed? Use your deposits to qualify.

Ready to Build Your Dream Home?

Tell us what you're looking for and we'll find the jumbo program that fits. Multiple programs, competitive rates, and a team that knows how to close high-value loans.

Malik Shalmiyev · NMLS #1542149

Team Malik Mortgage · Rize Mortgage (Standard Mortgage Capital LLC, NMLS #1604663) Licensed in FL, NJ & PA

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