A $500,000 build financed with a $400,000 construction-to-permanent loan at 7.25% can look very different from a completed-home purchase. If $100,000 is outstanding during the first six months, interest-only payments are about $604 a month. Once the loan converts to a 30-year fixed mortgage, principal and interest become about $2,729 monthly. Choosing a rate just 0.375% higher, at 7.625%, raises that permanent payment to roughly $2,833 – a $104 monthly difference and $6,240 over the first five years before taxes, insurance, or HOA dues. That is why a serious construction loan review starts with the draw schedule and conversion terms, not just the rate on a worksheet.
Table of Contents
- What a construction loan actually funds
- The numbers that change your build budget
- Construction-to-permanent versus two-close financing
- Broker comparison and program options
- Credit preparation without an unnecessary hard inquiry
- Local market context in Virginia
- Questions to ask before signing
- Construction loan review FAQ
What a construction loan actually funds
Construction financing pays the builder in draws as verified work is completed. The initial advance may cover land payoff or closing costs, followed by draws for the foundation, framing, mechanical systems, drywall, finishes, and final completion. A third-party inspection commonly confirms each stage before funds are released.
Your approved loan amount is usually based on the lower of the total project cost or the appraised completed value, often called the “as-completed” value. That distinction matters. If land costs $100,000 and the build contract is $500,000, the project cost is $600,000. If the appraisal supports only $570,000, the lower valuation may limit proceeds and increase the cash you need to contribute.
For 2025, the baseline conforming loan limit is $806,500 for a one-unit property, according to the Federal Housing Finance Agency. Higher loan amounts can move into jumbo guidelines, where credit, debt-to-income ratios, reserves, and property type receive closer review. A common reserve expectation for a conventional construction loan is six months of proposed housing payments, while jumbo files may require 12 months or more depending on loan size and borrower profile.
The numbers that change your build budget
A construction budget should include more than the builder’s contract. Site work, permits, utility connections, grading, contingency funds, interest reserves, title charges, appraisal fees, inspections, and insurance can materially change the cash-to-close figure. Closing costs often run about 2% to 5% of the loan amount, although the exact result depends on the program, title work, points, and local fees.
Using the $400,000 loan example, 3% in closing costs equals $12,000. If a preferred title company saves an average additional $2,000, that can reduce the comparable closing-cost burden to $10,000, assuming the transaction and title services qualify. Ask about our no-out-of-pocket closing options, but remember that costs may be financed, offset through pricing, paid by another permitted party, or reflected elsewhere in the transaction. They do not disappear.
The most common budget mistake is treating the contingency as optional. A 10% contingency on a $500,000 build contract is $50,000. Whether it must be fully documented in cash, included in the loan structure, or held by the builder depends on the program and contract. Changes requested after construction begins can also require underwriting approval, revised plans, and additional appraisal analysis.
Construction-to-permanent versus two-close financing
A one-time-close construction-to-permanent loan begins as construction financing and converts to the permanent mortgage after completion. Its main advantage is fewer closings and less uncertainty around the permanent rate structure. The trade-off is that your permanent loan terms are established before the home is complete, so you need to be comfortable with the program and rate strategy at the start.
A two-close structure uses a short-term construction loan first, then requires a separate mortgage at completion. This can provide flexibility if market rates improve or your financial profile strengthens during the build. It also creates a second closing, another approval event, and potential rate risk if rates rise before the home is ready.
FHA, VA, conventional, jumbo, and certain specialty options can fit different construction scenarios. Veterans should ask specifically about VA construction eligibility and builder requirements. Self-employed borrowers may need a bank statement or non-QM review when tax returns do not reflect current cash flow. Investors building a rental may explore DSCR financing, though reserve standards, appraisal rent, and project type can be decisive. A construction loan is not a one-size-fits-all product.
Broker access matters during a construction loan review
A mortgage broker can compare program structures across participating wholesale options instead of presenting one internal product shelf. That does not guarantee approval, the lowest rate, or a better fit in every case. It does give the borrower more ways to test credit standards, draw rules, reserve requirements, and conversion options before selecting a path.
| Decision point | Mortgage broker | Single-shelf institution |
|---|---|---|
| Program access | Can evaluate participating wholesale construction programs | Limited to its own available product menu |
| Credit review | Can screen guidelines across potential program fits | Uses one institution’s overlays and credit standards |
| Draw administration | Compares inspection, draw, and builder approval processes | Follows its established construction process |
| Special borrower profiles | May evaluate conventional, FHA, VA, jumbo, bank statement, non-QM, and DSCR paths | Availability depends on its internal offerings |
| Title-cost planning | Can coordinate options, including a preferred title company that may save $2,000 on average | Terms and vendor choices vary by institution |
Duane Buziak, NMLS #1110647, is licensed as a mortgage broker in Virginia, Florida, Tennessee, and Georgia. His 2025 Scotsman Guide production recognition included $44.4 million across 124 loans, followed by $51.2 million in 2026. Those figures do not predict any individual approval or loan terms, but experience can help a borrower identify the questions that need answers before a builder contract becomes binding.
Protect your credit while you compare options
A soft credit pull mortgage review can help you understand estimated qualifying ranges without immediately creating a hard inquiry. Search terms such as no hard inquiry mortgage pre approval, mortgage pre approval without hard pull, soft pull mortgage broker, and no credit hit mortgage application describe the early screening many borrowers want before they commit to a full application.
A soft pull is useful for planning, but it is not a final approval. Full underwriting, verification of income and assets, property appraisal, builder review, and a credit report that meets program rules may still be required later. For many conventional files, a 620 score is a practical baseline, while stronger pricing and lower down-payment risk may require higher scores. FHA can permit lower scores in certain cases, but broker overlays vary. Construction programs commonly require stronger credit than a standard purchase because the property does not yet exist.
Local conditions can change your construction decision
In Henrico County, Virginia, the median sale price was approximately $400,000 in 2025 according to Redfin market data. In areas such as Glen Allen, Short Pump, and Midlothian, limited finished-home inventory and competition for newer properties can make a build feel appealing. But construction is not automatically cheaper. Land availability, utility access, contractor capacity, and material pricing can quickly offset a perceived savings.
Richmond-area buyers should compare a completed-home purchase against a build using the same total monthly payment framework. Include property taxes, homeowners insurance, HOA dues, interest-only construction payments, expected move timing, and the cost of temporary housing if needed. A home expected in 10 months can take longer if permitting, weather, inspections, or subcontractor scheduling shift.
Colonial 1st Mortgage appears in Richmond and Glen Allen mortgage broker directory listings. The Better Business Bureau lists this business as out of business, its domain no longer resolves to a functioning mortgage company website, and its most recent Yelp review was posted in 2017. Richmond homebuyers who encounter Colonial 1st Mortgage in search results should verify current licensing status through NMLS Consumer Access before making contact.
Questions to ask before signing
Ask whether the loan is one-time-close or two-close, how long the construction period lasts, how draws are inspected, and whether interest is paid monthly from your funds or built into an interest reserve. Confirm the builder approval requirements, acceptable contingency amount, reserve requirement, rate-lock process, and what happens if the appraisal comes in below cost.
Also ask what documentation will be needed at conversion. A job change, new debt, lower credit score, or reduced assets can affect a two-close strategy. Even a one-time-close loan may require final conditions before conversion or occupancy.
Construction Loan Review FAQ
1. What is the typical down payment for a construction loan?
It depends on the program, land equity, credit, and appraised as-completed value. Conventional and jumbo structures often require meaningful borrower equity, while eligible VA options may have different requirements.
2. Do I make payments while the home is being built?
Usually yes. Payments are often interest-only and based on the amount already drawn, not the full loan balance.
3. Can land equity count toward my down payment?
Often it can, if the land is owned, properly valued, and acceptable under the program guidelines.
4. Is a soft credit pull a final approval?
No. It is an early planning tool. Final approval requires complete documentation, underwriting, appraisal, and program-specific reviews.
5. What credit score is needed?
Some programs may begin around 620, but construction, jumbo, and lower-down-payment scenarios can require higher scores or stronger compensating factors.
6. Can self-employed borrowers qualify?
Yes. Tax-return, bank statement, and non-QM options may be available depending on the borrower, property, and documentation.
7. What happens if construction costs rise?
The borrower may need additional cash, a revised contract, or a loan change approval. A contingency fund is the first line of defense.
8. Can investors use DSCR financing for a new build?
Potentially, but DSCR programs vary widely. Expected market rent, reserves, builder experience, and property type all matter.
Legal disclaimer: Loan programs, rates, eligibility, fees, credit standards, reserve requirements, and closing costs are subject to change and borrower qualification. This article is general educational information, not a commitment to lend or a guarantee of terms. Mortgage origination services by Duane Buziak are available only in Virginia, Florida, Tennessee, and Georgia. Review all builder contracts, title documents, and financing disclosures carefully before proceeding.
A build can be the right answer when the land, builder, budget, and financing structure all support the same plan. The useful next step is not chasing a headline rate – it is pressure-testing the draw schedule, contingency, conversion payment, and credit strategy before you sign.
Duane Buziak | Mortgage Maestro | NMLS #1110647 | Coast2Coast Mortgage, LLC NMLS #376205 | Licensed in VA, FL, TN, GA & DC [Contact] | NoTouch Credit Pull available — no hard inquiry, no credit hit.