How construction loans actually work

Before plans are final, get pre-approved so you know your true budget. Lenders look at credit (typically 620–680+ depending on program), debt-to-income (usually capped near 43%), and your down payment — cash plus any land equity.

Your lot must be owned or under contract, and your builder must pass lender approval: license, insurance, references, and financial standing. This vetting protects you as much as the lender — it's the single most common source of delays, so start it early.

Underwriting needs three documents: architectural plans and specifications, a line-item cost breakdown, and your signed construction contract. Most lenders also require a contingency reserve (typically 5–10%) for surprises.

The appraiser values a home that doesn't exist yet — a "subject to completion" appraisal based on your plans, specs, and comparable finished homes. The loan amount is built on this future value.

With a one-time close loan, this is your only closing: land purchase (if needed) and construction funds in one transaction, permanent rate locked before ground breaks. Two-time close borrowers will close again after construction.

Funds release in stages — foundation, framing, mechanicals, finishes — after an inspector verifies each stage is complete. You pay interest only on what's been drawn. In Michigan, every draw also requires the builder's sworn statement and lien waivers, verified by the title company.

Certificate of occupancy in hand, a final inspection and title update close out construction. A one-time close loan converts automatically to your permanent mortgage; a two-time close borrower shops and closes their permanent loan now.