Construction Loan Types: Complete Comparison (2026)
| Loan Type | Down Payment | Rate | Closings | Credit | Best For |
|---|---|---|---|---|---|
| One-Time Close (OTC) | 10-20% | 6.5-8.0% | 1 closing | 680+ | Most buyers (simplest, cheapest) |
| Two-Time Close | 10-25% | 7.0-9.0% | 2 closings | 680+ | Rate shoppers (lock perm rate later) |
| FHA OTC | 3.5% | 6.5-7.5% | 1 closing | 620+ | Low down payment, lower credit |
| VA Construction | $0 | 5.85-7.0% | 1 closing | 620+ | Veterans (best deal overall) |
| USDA Construction | $0 | 6.0-7.5% | 1 closing | 640+ | Rural areas, income limits |
| Owner-Builder | 20-25% | 7.5-9.5% | 1-2 closings | 720+ | Experienced builders acting as GC |
| Land Loan (Raw) | 35-50% | 8-12% | Separate | 700+ | Buy land now, build later |
| Land Loan (Improved) | 20-30% | 6-9% | Separate | 680+ | Lot with utilities, ready to build |
How Construction Loans Work (Step by Step)
Step 1: Get Pre-Approved
Apply with a construction lender. They'll review your credit, income, and construction plans. You'll need blueprints, a builder contract, and a construction budget. Get pre-approved for construction →
Step 2: Appraisal (Based on Plans)
The lender orders an appraisal of the future completed home based on your plans. The appraised value determines your loan amount. Pro tip: choose finishes that maximize appraisal value.
Step 3: Close & Construction Begins
After closing, your builder starts work. The lender releases funds in “draws” as milestones are completed (typically 4-6 draws). An inspector verifies each milestone.
Step 4: Interest-Only Payments During Build
You only pay interest on the amount disbursed. If $100K has been drawn on a $400K loan at 7.5%, your payment is ~$625/month (not the full $2,797).
Step 5: Convert to Permanent Mortgage
Once construction is complete (6-12 months), the loan converts to a standard 30-year mortgage. With OTC, this is automatic. With two-close, you refinance into a new permanent loan.
Typical Construction Draw Schedule
| Draw # | Milestone | % of Loan | Example ($400K) |
|---|---|---|---|
| 1 | Foundation complete | 15% | $60,000 |
| 2 | Framing & roofing complete | 25% | $100,000 |
| 3 | Mechanical (HVAC, plumbing, electrical) | 20% | $80,000 |
| 4 | Drywall, insulation, windows | 15% | $60,000 |
| 5 | Finishes (cabinets, flooring, fixtures) | 15% | $60,000 |
| 6 | Final inspection & certificate of occupancy | 10% | $40,000 |
One-Time Close: Why It's the Best Option for Most Builders
One-Time Close Advantages:
- ✓ Save $3,000-$7,000 in duplicate closing costs
- ✓ Lock your permanent rate NOW before construction starts
- ✓ No requalification risk — don't worry about credit/income changes
- ✓ One application, one approval, one closing
- ✓ Interest-only during construction (lower payments while building)
Construction Loan Rates Vary by 2%+ Between Lenders
On a $400K build, a 2% rate difference = $400/month. Compare construction lenders in 60 seconds.
Compare Construction Lenders →VA Construction Loans: Build with $0 Down
If you're a veteran, the VA construction loan is the best deal in construction financing: $0 down, no PMI, lowest rates (5.85-7.0%), and one-time close available. Check VA eligibility →
VA Construction Loan Lenders (2026):
| Lender | Down | Min Credit | OTC? | Notes |
|---|---|---|---|---|
| Veterans United | $0 | 620 | Yes | Largest VA lender. Best support. |
| Navy Federal | $0 | 620 | Yes | Military CU. Competitive rates. |
| USAA | $0 | 620 | Yes | Military families. Fast processing. |
Owner-Builder Construction Loans: Be Your Own General Contractor
Want to act as your own general contractor? Owner-builder loans allow it — but with stricter requirements.
Requirements:
- • 720+ credit score
- • 20-25% down payment
- • Proof of construction experience
- • Detailed plans + budget
- • Licensed subcontractors lined up
Potential Savings:
- • Save 10-20% on GC markup
- • On a $400K build: $40K-$80K savings
- • Full control over materials/subs
- • Higher risk if inexperienced
- • Fewer lenders offer this option
How Much Does It Cost to Build a House in 2026?
| Category | % of Total | Cost (2,000 sq ft) |
|---|---|---|
| Land | 15-25% | $50,000-$200,000+ |
| Foundation | 8-12% | $25,000-$50,000 |
| Framing & Roofing | 15-20% | $50,000-$80,000 |
| Mechanical (HVAC, Plumbing, Electrical) | 15-20% | $40,000-$70,000 |
| Interior Finishes | 20-30% | $60,000-$120,000 |
| Permits, Fees, Insurance | 5-10% | $15,000-$35,000 |
| TOTAL (excluding land) | 100% | $300,000-$500,000 |
Costs vary significantly by region: $120/sq ft (rural Midwest) to $350+/sq ft (coastal California).
Ready to Build? Get Pre-Approved Today
Compare construction loan rates from lenders who specialize in new builds. One-time close, VA, and FHA options available.
Frequently Asked Questions
How does a construction loan work?
What is a one-time close construction loan?
What are the requirements for a construction loan?
Can I get a VA construction loan?
How much does it cost to build a house in 2026?
What is a land loan and how does it work?
Related Guides
VA Loan Guide 2026
$0 down, no PMI. Full guide.
FHA Loan Guide 2026
3.5% down, 580 credit.
No Money Down Options
7 ways to buy with $0 down.
Meet Emily
Construction & Commercial Loans Expert
Emily Chen specializes in complex financing solutions for construction projects and commercial real estate investments. With 8 years of experience in construction-to-permanent loans and DSCR financing, she has funded over $200 million in construction and investment property projects. Her expertise in navigating construction loan complexities and commercial underwriting makes her invaluable for real estate investors and builders.
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Funded $200M+ in construction projects