A construction loan pays for building a home in stages instead of handing you the full amount at closing. The lender releases money in “draws” as the builder finishes each phase and an inspector confirms the work, and during the build you typically pay interest only on the amount drawn so far. When the home is complete, the loan either converts into a regular mortgage or is paid off by one.
I’ve spent more than two decades building homes across Central Florida, and I’ve seen how a well-planned loan makes the whole project feel smoother for everyone. Here’s what to know before you start.
1. The Two Main Types of Construction Loans
Construction-to-permanent (one-time close). One application, one approval and one closing. The loan funds the build, then converts into a standard mortgage, usually a 15- or 30-year term. You pay one set of closing costs, which is why many custom home clients prefer this route.
Construction-only (two-time close). This short-term loan covers the build, typically for about a year, and is then paid off with a separate mortgage. It means two closings and two sets of costs, but it can give you the flexibility to shop for your permanent mortgage once the home is finished.
Government-backed options exist too. FHA offers a construction-to-permanent loan that may require as little as 3.5% down, and VA construction loans may require no down payment for eligible borrowers. Fannie Mae also supports both single-closing and two-closing construction-to-permanent financing through lenders that offer it.
2. What Lenders Typically Look For
Construction loans have a few more moving parts than a standard mortgage, so lenders review both you and the project:
- Down payment: often around 20%, though some programs go lower
- Credit and debt: many lenders look for a score around 680 or higher (some accept 620) and a manageable debt-to-income ratio
- A licensed builder: most lenders want a qualified, licensed contractor with references; in Florida, you can verify a contractor’s license through the Department of Business and Professional Regulation (DBPR)
- Plans, specs and a signed contract: a detailed construction contract with pricing, plans and a schedule
- An “as-completed” appraisal: the appraiser values the finished home based on the plans, specifications and lot
3. How Your Land Fits In
If you already own your lot, its value may count toward your equity in the project, which can reduce the cash you need at closing. If you’re buying the lot, many construction-to-permanent loans can include the land purchase in the same financing. Either way, the borrower generally needs to hold title to the lot.
4. How the Draw Schedule Works
The draw schedule is the heartbeat of a construction loan. A typical schedule follows the major phases of the build:
- Site work and foundation
- Framing and roof structure (in Central Florida, often block walls and a bond beam first)
- Dry-in: roof covering, windows and exterior doors
- Rough mechanical, electrical and plumbing
- Drywall, interior finishes and final completion
Before each draw, the lender’s inspector visits the site to confirm the work, and the funds go out, often directly to the builder. Expect several inspections over the course of the project. During construction, your monthly payment typically covers only interest on the money disbursed, so it starts small and grows as the home takes shape.
5. Florida-Specific Steps That Protect Owners
Florida’s Construction Lien Law (Chapter 713, Florida Statutes) includes several steps designed to keep payments organized and protect the owner:
- Notice of Commencement: recorded in the county records and posted on the job site before the first inspection. Your lender, title company and builder coordinate this
- Notices to Owner: subcontractors and suppliers may send these so you know who’s working on your home
- Lien releases and the contractor’s final payment affidavit: documents confirming that the people who worked on the home have been paid
Plans are also reviewed against the Florida Building Code edition in effect when your permit is submitted, which your builder and engineer design to from the start.
6. Planning for a Smooth Build
A few habits help construction financing run smoothly:
- Build a contingency into your budget for upgrades or changes you decide on along the way
- Make selections early, such as cabinets, flooring and fixtures, so the budget and schedule stay accurate
- Ask about rate options: construction loan rates are often variable during the build, and some construction-to-permanent programs let you lock the permanent rate up front. Rates change frequently, so compare current offers from a few lenders
- Coordinate insurance: lenders usually require builder’s risk coverage during construction and a homeowners policy at completion
FAQ
How long does a construction loan last in Florida? The construction phase is typically about 12 months, depending on the size of the home and the lender’s terms. Custom homes may need longer, and many lenders offer extensions when planned in advance.
Can I use a construction loan to build an investment property? Yes, some lenders finance second homes and rental properties, often with different down payment and credit guidelines than for a primary residence.
Do I make payments during construction? Usually yes, typically interest-only payments on the amount drawn so far. Full principal and interest payments start after the loan converts or the permanent mortgage closes.
Let’s Plan Your Build
The best construction loan experience starts with clear plans, a realistic budget and a builder who works closely with your lender. If you’re planning a custom home or investment property in Central Florida, send me a message or visit queenhomesonline.com, and let’s map out your project together.
Loan programs, terms and requirements vary by lender and change over time. This article is general information, not financial, legal or tax advice. Please consult a licensed loan officer, a Florida attorney and your own advisors before making decisions.
