Understanding Construction Loans
Construction loans can mean a lot of things. Whether you’re building a brand-new home, tackling a major renovation, or financing a second-lien mortgage for home improvements, the process works a little differently for each.
The biggest thing? Your lender needs a clear scope of work—what’s being done, the cost, and the project details.
For any renovation construction loan or remodel construction loan, here’s what you’ll need to provide:
- Plans & Specs – A detailed outline of what’s going into the home (e.g., granite countertops, hardwood floors).
- Budget – A line-by-line breakdown of costs (e.g., $10,000 for a kitchen remodel, $20,000 for a new roof).
- Draw Schedule – How the money will be released throughout the project, ensuring funds are allocated appropriately.
How Does the Draw Process Work?
For most construction loans, the lender won’t release all the funds at once. Instead, money is distributed in stages called draws, which happen as work is completed. Before each draw is released, an inspection ensures the project is progressing as planned. A typical draw schedule might look like this:
- Initial draw – Covers site prep, foundation, and framing.
- Mid-project draw(s) – Covers key milestones like roofing, electrical, and plumbing.
- Final draw – Paid out once the construction is complete and inspected.
The final payment is typically held until the project is 100% complete, ensuring everything is finished correctly before funds are fully disbursed.
FHA 203k Limited in Texas
The FHA 203k Limited loan is ideal for smaller renovation projects. Unlike full construction loans, it doesn’t require an FHA consultant or draw requests, making it a streamlined option for homeowners.
- Up to $30,000 for renovations
- Contractors can receive 50% of project funds up-front (instead of waiting for draw schedules)
- Same underwriting process as a standard 203k construction loan
- No major structural changes allowed
This option is great for homeowners looking to upgrade kitchens, bathrooms, or flooring without jumping through extensive financing hoops. Borrowers must use the property as a primary residence and meet FHA loan requirements.
When Should You Use an FHA 203k Loan?
If you’re looking to finance home improvements but don’t have enough equity for a home equity loan, an FHA 203k loan could be the solution. It’s also useful for homebuyers purchasing a fixer-upper, allowing them to roll purchase price and renovation costs into a single mortgage.
Learn more about FHA 203k loans with the Mortgage Mark team.
VA Renovation Home Loan
For veterans looking to renovate, the VA Renovation Loan offers an option for non-structural improvements (think: new cabinets, flooring, or HVAC updates).
- Renovation costs capped at ~$30,000 (VA’s limit is $35,000 but includes fees and contingency reserves)
- No up-front payments to contractors
- Inspections required after each draw to confirm work is completed
- Inspection fees ($200 per draw) are rolled into the loan amount
- A 10%-15% contingency fund is required, depending on utility status
For example, if you’re financing $30,000 in construction costs and utilities are working, you’ll need to add a $3,000 contingency, bringing the total loan amount to $33,000.
A VA renovation loan is a great option for veterans who want to improve an existing home without taking out a home equity loan or using credit cards to finance repairs.
Find out if a VA renovation loan is right for you with the Mortgage Mark team.
HomeStyle Renovation Loan
The HomeStyle Renovation Loan allows for up-front reimbursement of 50% of material costs—a unique benefit not found in most renovation loans. This flexibility helps contractors purchase materials quickly, keeping projects on track.
Homeowners who want to finance major renovations with a renovation construction loan can use the HomeStyle loan for everything from kitchen remodels to adding a new room or garage.
See if HomeStyle Renovation Loans fit your project with the Mortgage Mark Team.
New Construction Loans: One-Time vs. Two-Time Close
If you’re building a home from the ground up, there are two main ways to finance it:
Two-Time Close (Traditional Route)
- First loan: Short-term interim construction project loan (covers building costs, lasts through the construction period)
- Second loan: Refinances the interim loan into a traditional mortgage once the home is built
- More lender options when transitioning to permanent financing, potentially securing a better rate
One-Time Close (Simplified Process)
- Single loan: Covers both construction and permanent financing
- No need for refinancing after construction is completed
- Lower closing costs compared to two separate loans
- Interest rate locked up front (typically an ARM, though fixed-rate options exist)
The right option depends on your financial situation, debt-to-income ratio, timeline, and comfort with the process.
Construction to Permanent Loans: What to Know
A construction to permanent loan combines a short-term construction loan with a long-term mortgage, simplifying the financing process. During construction, borrowers typically make interest-only payments, keeping initial costs lower. Once the project is complete, the loan converts into a traditional mortgage.
Benefits of Construction to Permanent Loans
- One closing instead of two, reducing fees
- More predictable long-term financing
- Lower initial payments with interest-only structure
If you’re considering a construction to permanent loan, make sure you understand the interest rate structure, closing costs, and lender-specific requirements. Learn more about construction to permanent loans at MortgageMark.com.
Ready to Build or Renovate? Let’s Talk!
Navigating construction loans can be complex, but you don’t have to do it alone. Whether you’re looking to build from scratch, renovate your home, or finance a second-lien home improvement, our team is here to help.
Mark Pfeiffer
Regional Sales Manager
Loan Officer, NMLS # 729612
(972) 829-8639
MortgageMark@MortgageMark.com