How Construction Loans Help Finance Your Dream House

Construction loans pay for home building or renovation and are paid in full or converted to permanent mortgages when the work is completed.
Barbara Marquand
Hal M. Bundrick, CFP®
By Hal M. Bundrick, CFP® and  Barbara Marquand 
Updated
Edited by Alice Holbrook Reviewed by Michelle Blackford

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Building a house is a chance to get everything you want in a home, and a construction loan lays the foundation for making it happen. Here's how the different types of construction loans work and how to choose a lender before breaking ground.

What is a construction loan?

Construction loans cover the cost of building or rehabilitating a house. The lender disburses the money in installments as the work advances. Once building is complete, home construction loans are either converted to permanent mortgages or paid in full. During the construction phase, the borrower pays only interest on the loan.

When is a construction loan used?

A construction loan can be used to finance a custom home — a house designed and built to your specifications — or to pay for a major renovation.

You don't need a construction loan to buy a production home in a new development. With a production home, the builder or developer finances the construction. You choose from a set number of offered house plans and features, and, when the construction is finished, purchase the house from the builder with cash or a traditional mortgage.

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Mortgage loans from our partners

New American Funding - PURCHASE logo
Check Rate

on New American Funding

New American Funding

4.5

NerdWallet rating 
New American Funding - PURCHASE logo

4.5

NerdWallet rating 
Min. credit score 
500

Min. down payment 
3.5%

Check Rate

on New American Funding

Better - PURCHASE logo
Check Rate

on Better

Better

4.5

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Better - PURCHASE logo

4.5

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Min. credit score 
620

Min. down payment 
3%

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on Better

NBKC - PURCHASE logo
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on NBKC

NBKC

4.5

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4.5

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Min. credit score 
620

Min. down payment 
3%

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