Construction Loan Rates Today: What to Expect in 2026

A construction loan finances building a new home. You receive funds in stages (draws) as construction progresses, paying interest-only during building. After completion, the loan either converts to a permanent mortgage (one-time close) or you refinance into a separate mortgage (two-time close). Construction loans require 20-25% down, 680+ credit and an approved builder with detailed plans and budget.

How Construction Loans Work in 2026

Construction Financing Structure

Unlike a regular mortgage, construction loans:

• Fund home construction in stages
• Have interest-only payments during building
• Convert to permanent financing after completion
• Require builder approval and project oversight

The Draw Process

Money is released in “draws” as work is completed:

1. Foundation complete: First draw released
2. Framing complete: Second draw
3. Rough-in complete: Third draw
4. Drywall/interior: Fourth draw
5. Final completion: Last draw

Before each draw:

• Inspector verifies completed work
• Lender approves release
• Funds go to builder (not you)

Interest Payments During Construction

You pay interest only on drawn amounts:

Example:

• Total loan: $400,000
• Month 1 (draw $80,000): Interest on $80,000
• Month 3 (draw $120,000): Interest on $200,000
• Month 6 (draw $100,000): Interest on $300,000

Interest payments increase as more money is drawn.

Types of Construction Financing Options

Construction-to-Permanent Loan (One-Time Close)

How it works:

• Single loan for construction and permanent mortgage
• One closing, one set of fees
• Converts automatically when building is complete

Advantages:

• One closing cost
• Rate locked from start
• Simpler process
• No requalification after construction

Disadvantages:

• Less flexibility if plans change
• May have slightly higher rates
• Must commit to permanent terms upfront

Construction-Only (Two-Time Close)

How it works:

• Separate loan for construction
• Refinance into permanent mortgage when complete
• Two closings, two sets of fees

Advantages:

• More flexibility
• Can shop permanent financing later
• May get better permanent rate

Disadvantages:

• Two sets of closing costs
• Must qualify twice
• Rate risk on permanent loan
• More paperwork

Renovation/Rehab Loans

For major renovations to existing properties:

FHA 203(k): FHA-insured renovation financing

Fannie Mae HomeStyle: Conventional renovation loan

VA Renovation: For eligible veterans

Construction Loan Requirements and Qualifications

Down Payment for Construction Loans

Loan Type	Typical Down Payment
Construction-to-permanent	20-25%
Construction-only	20-25%
FHA construction	3.5%
VA construction	0% (if available)

Down payment is based on total project cost (land + construction).

Credit Score

Score	Availability
720+	Best rates, most options
680-719	Good options
660-679	Limited options, higher rates
Below 660	Very difficult

Debt-to-Income Ratio

Standard limits apply:

• Back-end DTI: 43-45%
• Calculated on future permanent payment

Cash Reserves

Typically 6-12 months of reserves required:

• Construction projects have cost overruns
• Lenders want cushion for surprises

Builder Requirements

Lender-approved builder must have:

• Valid contractor’s license
• Liability insurance
• Workers’ compensation insurance
• Track record of completed projects
• References and portfolio
• Financial stability

You usually cannot act as your own builder (owner-builder loans are rare and require experience).

Project Documentation

Required before approval:

• Detailed plans and blueprints
• Specifications (materials, finishes)
• Itemized construction budget
• Timeline/schedule
• Building permits
• Appraisal (based on plans)

The Construction Loan Application Process

Step 1: Construction Loan Pre-Qualification

Verify you qualify for the total project:

• Land cost (if not owned)
• Construction costs
• Contingency (10-15% buffer)

Step 2: Find Land (If Needed)

Options:

• Buy land separately, then get construction loan
• Include land in construction loan
• Use land you already own as down payment

Step 3: Select Builder

Choose a lender-approved builder:

• Get multiple bids
• Check references
• Review portfolio
• Verify licensing and insurance

Step 4: Finalize Plans and Budget

Work with builder on:

• Detailed blueprints
• Materials and specifications
• Itemized budget
• Construction timeline

Step 5: Apply for Construction Loan

Submit:

• Personal financial documents
• Project plans and budget
• Builder information
• Land documentation

Step 6: Appraisal

Appraiser values the completed home based on plans:

• “Subject to completion” appraisal
• Confirms value supports loan amount
• May suggest modifications if value is low

Step 7: Approval and Closing

Lender approves and you close:

• Sign loan documents
• Pay closing costs
• Receive construction loan commitment

Step 8: Construction Phase

Building begins:

• Builder requests draws as work progresses
• Inspector verifies completion of each phase
• You pay interest on drawn amounts
• Typical timeframe: 6-12 months

Step 9: Final Inspection and Conversion

When complete:

• Final inspection confirms completion
• Certificate of occupancy issued
• Loan converts to permanent mortgage (one-time close)
• Or refinance into permanent mortgage (two-time close)

Construction Mortgage Rates: What You’ll Pay

Construction Loan Rates Today

Construction loans have higher rates than standard mortgages:

• Typically 1-2% above current mortgage rates
• If 30-year fixed is 6.5%, expect 7.5-8.5% during construction
• Variable rate during construction is common
• Permanent rate may be lower after conversion

Closing Costs

One-time close: 3-5% of total loan (paid once)

Two-time close:

• Construction closing: 2-4%
• Permanent closing: 2-3%
• Total: 4-7% (but spread over time)

Interest Reserve

Some loans include interest reserve:

• Prepaid interest added to loan
• Covers interest payments during construction
• Reduces out-of-pocket during building

Inspection Fees

Each draw requires inspection:

• $75-$150 per inspection
• 4-6 inspections typical
• Total: $300-$900

Managing Cost Overruns

Why Overruns Happen

• Material price increases
• Change orders (upgrades)
• Unforeseen conditions
• Weather delays
• Labor shortages

How to Prepare

Build in contingency:

• 10-15% of construction budget
• Required by most lenders
• Your cushion for surprises

Control change orders:

• Every change costs money
• Get written cost before approving
• Changes delay completion

Monitor progress:

• Visit site regularly
• Review invoices and draw requests
• Communicate with builder

If You Run Over Budget

Options:

• Use contingency funds
• Pay difference from savings
• Reduce scope (eliminate upgrades)
• Request loan modification (difficult)

Land Considerations

Buying Land with Construction Loan

Combined financing:

• Land + construction in one loan
• Single closing
• Land must be suitable for building

Separate land loan:

• Buy land first with land loan
• Use land as down payment for construction
• Two separate transactions

Using Land You Own

Land as equity:

• Appraised value counts toward down payment
• May reduce cash needed
• Must be owned outright or have significant equity

Land Requirements

Lenders verify:

• Buildable lot
• Proper zoning
• Access to utilities
• Environmental clearance
• Clear title
• No restrictions preventing planned construction

FHA and VA Construction Loan Options

FHA Construction Loans: 203(k) New Construction

One-time close FHA:

• 3.5% down payment
• 580+ credit score
• FHA-approved builder required
• MIP required

Advantages:

• Lower down payment
• Lower credit requirements
• Government backing

Disadvantages:

• More paperwork
• Fewer lenders offer it
• Property standards apply

VA Construction Loans

Available to eligible veterans:

• 0% down payment
• No PMI
• VA-approved builder
• VA minimum property requirements

Challenges:

• Few lenders offer VA construction
• More complex process
• Builder must understand VA requirements

How to Find Construction Loan Lenders

Where to Find Construction Financing

Local banks and credit unions:

• Often have construction programs
• Know local builders and markets
• More flexible on unique situations

National lenders:

• Standardized programs
• May be less flexible
• Larger capacity

Mortgage brokers:

• Access to multiple lenders
• Can find specialized programs
• Helpful for complex situations

Questions to Ask

1. Do you offer one-time or two-time close?
2. What are your builder requirements?
3. How are draws handled?
4. What’s the interest rate during construction?
5. What happens if construction is delayed?
6. How long do I have to complete construction?
7. What contingency reserve is required?

Common Construction Loan Mistakes

Underestimating Costs

Problem: Budget too tight, run out of money

Solution: Include 15% contingency, get detailed bids, expect the unexpected

Choosing the Wrong Builder

Problem: Builder issues cause delays, cost overruns, quality problems

Solution: Research thoroughly, check references, verify licensing and insurance

Not Understanding the Draw Process

Problem: Cash flow issues, delays in funding

Solution: Understand timing, have reserves, communicate with lender

Making Too Many Changes

Problem: Change orders add cost and time

Solution: Finalize plans before starting, limit changes to essentials

Ignoring the Timeline

Problem: Rate lock expires, loan terms change, added costs

Solution: Build in buffer, monitor progress, address delays quickly

Frequently Asked Questions

How much down payment do I need for a construction loan?

Typically 20-25% of total project cost. FHA construction loans require only 3.5% down. VA construction loans may offer 0% down for eligible veterans.

Can I be my own contractor?

Rarely. Most lenders require licensed, insured, experienced builders. Owner-builder loans exist but are uncommon and require demonstrated construction experience.

How long do I have to complete construction?

Typically 12 months, sometimes up to 18 months. Extensions may be possible but often involve fees or rate changes.

What if my construction costs exceed my loan?

You’ll need to cover the difference from savings, use your contingency reserve, reduce scope or attempt a loan modification (difficult once construction starts).

Are construction loan rates higher?

Yes. Expect rates 1-2% higher than standard mortgages during construction. The permanent rate (after conversion) is typically in line with market rates.

Can I include land in my construction loan?

Yes, many construction loans can include land purchase. Alternatively, if you already own land, its equity can count toward your down payment.