# Construction loans explained

> How construction loans work: single-close construction-to-permanent vs two-time close, draws and inspections, and interest-only payments during the build.

URL: https://mail.mortgage-math-us.com/loan-types/construction-loans/  
Last reviewed: 2026-10-28 · By the MortgageMath US Editorial team

## Quick answer

A construction loan pays your builder in stages, or draws, as work passes inspection, and you usually pay only interest on the amount drawn so far. A **single-close (construction-to-permanent)** loan converts automatically into a regular mortgage when the house is finished, with one application and one set of closing costs; a **two-time close** uses a short-term construction loan and then a separate mortgage. Fannie Mae buys single-close loans only after conversion and limits the construction period to 12 months at a time and 18 months in total.

## Key facts

| Fact | Value | Source | As of |
|---|---|---|---|
| Fannie Mae single-close: longest construction period | 12 months | [Fannie Mae Selling Guide B5-3.1-02](https://selling-guide.fanniemae.com/sel/b5-3.1-02/conversion-construction-permanent-financing-single-closing-transactions) | May 6, 2026 |
| Fannie Mae single-close: longest total, with extensions | 18 months | [Fannie Mae Selling Guide B5-3.1-02](https://selling-guide.fanniemae.com/sel/b5-3.1-02/conversion-construction-permanent-financing-single-closing-transactions) | May 6, 2026 |
| Construction phase exempt from the ability-to-repay rule if no longer than | 12 months | [12 CFR 1026.43](https://www.ecfr.gov/current/title-12/chapter-X/part-1026/subpart-E/section-1026.43) | Oct 22, 2026 |
| Fannie Mae maximum LTV, principal residence purchase | 97% | [Fannie Mae Eligibility Matrix](https://singlefamily.fanniemae.com/media/20786/display) | Apr 1, 2026 |
| 2026 conforming limit for the permanent loan | $832,750 | [FHFA](https://www.fhfa.gov/news/news-release/fhfa-announces-conforming-loan-limit-values-for-2026) | 2026 limit |

## How a construction loan works

A bank won’t hand you the full loan on day one when the collateral is a vacant lot. Instead, the lender approves a total amount based on your plans, budget and builder, then releases money in **draws** as each stage of work is finished and inspected. During construction you typically pay **interest only** on what has been drawn, so payments start small and rise as the house goes up.

When the house is complete, the construction debt has to become a long-term mortgage. How that happens is the main choice you make.

## Single-close vs two-time close

| | Single-close (construction-to-permanent) | Two-time close |
|---|---|---|
| Closings | One | Two: construction loan, then mortgage |
| Closing costs | One set | Two sets |
| Qualifying | Once, before construction | Again for the permanent mortgage |
| Permanent rate | Locked at closing or set at conversion, depending on the lender | Whatever rates are when the house is done |
| Flexibility | Committed to one lender | Can shop for the permanent mortgage |
| Risk | Less paperwork risk at the end | Job, credit or rate changes can derail the second loan |

A single-close loan suits most borrowers who want certainty. A two-time close can make sense if you expect rates to fall, need a construction lender that specializes in custom builds, or plan to sell another home to make a large down payment on the permanent loan.

## Fannie Mae’s single-close rules

Many single-close loans are [conventional loans](https://mail.mortgage-math-us.com/loan-types/conventional-loans/) written to Fannie Mae’s Selling Guide so they can be sold once the house is finished. Its main rules:

- **Fannie Mae buys the loan only after construction is complete** and the loan has converted to permanent financing.
- **The construction period** can’t run longer than 12 months at a time, or 18 months including extensions. No exceptions are granted.
- **The permanent loan** can have a term of up to 30 years after conversion, not counting the construction period.
- **Loan-to-value on a purchase** is measured against the lower of the total cost (construction plus the lot’s price) or the home’s “as completed” appraised value. If you already own the lot when the first draw is made, the loan is treated as a limited cash-out refinance and measured against the as-completed value, so equity in the land works like a down payment.
- **At conversion**, only the rate, loan amount, term and amortization type can change; the amount can rise only for documented cost increases, and the only allowed amortization change is from adjustable to fixed.

Federal ability-to-repay rules exempt a construction phase of 12 months or less, so lenders structure the construction stage as a temporary loan and apply full underwriting to the permanent mortgage.

## Government-backed construction loans

[FHA](https://mail.mortgage-math-us.com/loan-types/fha-loans/) and VA loans can also be used for one-time-close construction-to-permanent financing through lenders that offer it, with the same benefits as on a purchase — low or no down payment and the usual mortgage insurance or [VA funding fee](https://mail.mortgage-math-us.com/loan-types/va-loans/), which applies to construction loans at the purchase rates. USDA guaranteed loans can finance building a new home in an eligible rural area too; see [USDA loans](https://mail.mortgage-math-us.com/loan-types/usda-loans/). Fewer lenders offer these programs, so expect to search harder and to need a builder the lender approves.

## Draws, inspections and interest during the build

Before closing, your builder gives the lender a detailed budget and a draw schedule tied to stages of work. At each stage an inspector confirms the work is done, the title is checked for new liens, and the lender pays the builder or the subcontractors directly.

> **Worked example: Interest during construction on a $400,000 loan — example draw schedule, rate of 7.24% used only to illustrate**
>
> | Stage | Month | Share | Draw |
> |---|---:|---:|---:|
> | Site work and foundation | 1 | 10% | $40,000 |
> | Framing and roof | 3 | 20% | $80,000 |
> | Windows, plumbing, electrical and HVAC rough-in | 5 | 20% | $80,000 |
> | Insulation, drywall and interior work | 7 | 25% | $100,000 |
> | Finishes and final inspection | 9 | 25% | $100,000 |
> 
> | Month | Balance drawn | Interest-only payment |
> |---|---:|---:|
> | Month 1 | $40,000 | $241 |
> | Month 3 | $120,000 | $724 |
> | Month 5 | $200,000 | $1,207 |
> | Month 7 | $300,000 | $1,810 |
> | Month 9 | $400,000 | $2,413 |
> | Month 10 | $400,000 | $2,413 |
> 
> Months between draws repeat the previous payment. Over the 10-month build, interest-only payments total about $12,791, far less than 10 months of interest on the full loan ($24,133). After conversion, principal and interest on $400,000 over 30 years comes to $2,726 a month at the same rate.

> **Watch out: Budget for overruns**
>
> Construction rarely goes exactly to plan. If costs exceed the budget, lenders usually expect you to pay the difference in cash before more money is drawn. Keep a contingency fund and get a fixed-price contract where you can.

## How to get a construction loan

**How a single-close construction loan works**

1. **Pick the plans, lot and builder** — Lenders review the builder’s license, insurance and track record as well as your finances.
2. **Get approved** — The lender underwrites you and orders an [appraisal](https://mail.mortgage-math-us.com/buying/appraisal-and-inspection/) of the home “as completed” from the plans and specifications.
3. **Close once** — You sign for the construction phase and the permanent mortgage together, and the lot is bought or pledged.
4. **Build in stages** — Each draw follows an inspection; you pay interest on the amount drawn.
5. **Finish and convert** — A final inspection confirms completion, and the loan converts to a regular mortgage with principal-and-interest payments.

Many lenders also expect a larger down payment on construction loans than on an existing home, and some require cash reserves. Compare total costs, including any construction-period fees, on each lender’s Loan Estimate, and check the [closing cost estimator](https://mail.mortgage-math-us.com/tools/closing-cost-calculator/) for your state.

## Frequently asked questions

### What is a construction-to-permanent loan?

A single loan with one closing that pays for building the home in draws and then converts automatically into a regular mortgage when construction is finished.

### Do you pay interest during construction?

Usually yes, but only on the money drawn so far, so payments start small and grow. In the example, a $400,000 build costs about $12,791 in interest over 10 months.

### How long can construction take on a single-close loan?

Lenders set their own deadlines. For loans sold to Fannie Mae, no single construction period can exceed 12 months, and the total, including extensions, can’t exceed 18 months.

### Can I use an FHA or VA loan to build a house?

Yes, through lenders that offer FHA or VA construction-to-permanent loans. The usual FHA mortgage insurance or VA funding fee applies, and the lender will need to approve your builder.

### Does owning the land help with a construction loan?

Yes. For Fannie Mae single-close loans, if you own the lot when construction starts, the loan-to-value is based on the finished home’s appraised value, so your equity in the land counts toward the down payment.

### What happens if construction goes over budget?

You usually have to cover the overrun in cash before the lender releases more money, unless your loan includes a contingency reserve. Plan a cushion before you start.

## Sources

- [Freddie Mac Primary Mortgage Market Survey](https://www.freddiemac.com/pmms) — 30-year fixed rate, national weekly average (Week of Oct 29, 2026)
- [Fannie Mae Selling Guide B5-3.1-02](https://selling-guide.fanniemae.com/sel/b5-3.1-02/conversion-construction-permanent-financing-single-closing-transactions) — Fannie Mae single-closing construction loan: longest single construction period; Fannie Mae single-closing construction loan: longest total construction period, extensions included (May 6, 2026)
- [12 CFR 1026.43](https://www.ecfr.gov/current/title-12/chapter-X/part-1026/subpart-E/section-1026.43) — Construction phase of a construction-to-permanent loan is exempt from the ability-to-repay rule if no longer than (Oct 22, 2026)
- [Fannie Mae Eligibility Matrix](https://singlefamily.fanniemae.com/media/20786/display) — Fannie Mae maximum LTV, one-unit principal residence purchase (Apr 1, 2026)
- [FHFA](https://www.fhfa.gov/news/news-release/fhfa-announces-conforming-loan-limit-values-for-2026) — 2026 baseline conforming loan limit (one-unit) (2026 limit)
- [Fannie Mae Selling Guide B5-3.1-02: Single-closing construction-to-permanent transactions](https://selling-guide.fanniemae.com/sel/b5-3.1-02/conversion-construction-permanent-financing-single-closing-transactions)
- [Fannie Mae Selling Guide B5-3.1-01: Construction-to-permanent financing overview](https://selling-guide.fanniemae.com/sel/b5-3.1-01/conversion-construction-permanent-financing-overview)
- [VA: Funding fee and closing costs (purchase and construction loans)](https://www.va.gov/housing-assistance/home-loans/funding-fee-and-closing-costs/)

_General information, not financial advice._