Understanding Construction Mortgages
Financing new construction works differently from buying an existing home. Because the property does not exist yet, lenders use construction loans that disburse funds as building progresses, then convert to permanent mortgages. Understanding your options, especially when building in Summit and Cuyahoga County communities like Twinsburg, Solon, or Aurora, helps you choose the best program for your situation.
Quick Overview
Construction loan funds the build → Draws released at milestones → Converts to permanent mortgage at completion
Types of Construction Financing
Construction-to-Permanent (One-Time Close)
The most popular option combining both loans in one closing.
- Single application and closing
- One set of closing costs
- Rate may lock at closing or conversion
- Automatically converts to permanent mortgage
- Less paperwork and complexity
Stand-Alone Construction (Two-Time Close)
Separate construction and permanent loans.
- Two applications and closings
- Two sets of closing costs
- Can shop rates at completion
- More flexibility but more risk
- Useful if you expect rates to drop
Loan Program Options
Conventional Construction Loans
- Down payment: 20-25% typical
- Credit score: 680-720+ preferred
- DTI: Usually 43-45% maximum
- Most flexibility in terms and structure
FHA Construction Loans
- Down payment: 3.5% minimum
- Credit score: 580+ (620+ preferred)
- Mortgage insurance: Required
- Builder requirements: Must be FHA-approved
- Fewer lenders offer this program
VA Construction Loans
- Down payment: 0% for qualified veterans
- No mortgage insurance
- Builder requirements: VA registration required
- Limited availability: few lenders participate
USDA Construction Loans
- Down payment: 0% in eligible rural areas
- Income limits apply
- Property location restrictions
- Very limited availability
The Construction Loan Process
- Pre-qualification: Verify income, credit, and down payment
- Builder selection: Choose licensed, insured builder
- Plans and specs: Finalize design and specifications
- Full application: Submit complete loan package
- Appraisal: Based on plans and comparable sales
- Approval: Lender commits to funding
- Closing: Sign documents, funds available for draws
- Construction: Builder requests draws at milestones
- Completion: Final inspection, certificate of occupancy
- Conversion: Loan becomes permanent mortgage
Draw Schedule
Funds are released in draws as construction progresses:
| Milestone | Typical % |
|---|---|
| Land/site work | 10-15% |
| Foundation complete | 10-15% |
| Framing complete | 15-20% |
| Dry-in (roof, windows) | 10-15% |
| Mechanical rough-in | 10-15% |
| Drywall complete | 10% |
| Final completion | 15-20% |
Requirements
Borrower Requirements
- Good credit (680+ for conventional, 580+ for FHA)
- Stable income and employment
- Adequate down payment
- Cash reserves (6-12 months)
- Debt-to-income below limits
Builder Requirements
- Licensed and registered
- Adequate insurance (liability, workers' comp)
- Track record of completed projects
- Financial stability
- Signed construction contract
Property Requirements
- Complete plans and specifications
- Approved by local building department
- Appraised value supports loan amount
- Clear title (or purchase contract for land)
Ohio Construction Lenders
Construction loans are available from:
- Local banks and credit unions
- Regional banks (First Federal, Dollar Bank, KeyBank)
- Some national lenders
- Builder-preferred lenders
Shop at least 3 lenders. Rates and terms vary significantly.
Tips for Success
- Get pre-qualified early before designing
- Choose an experienced builder lenders trust
- Complete plans before applying for faster approval
- Keep credit clean: avoid new debt
- Maintain reserves for contingencies
- Understand draw process to plan cash flow
Learn more about financing a custom home build and our financing services. Best Construction works with multiple construction lenders in Ohio. We help connect you with experienced lenders and guide you through the financing process for your new construction project. First-time buyers should also check out the Own in Ohio Buyer's Guide for additional financing resources and programs.
Frequently Asked Questions
A construction mortgage (or construction loan) provides funds to build your home, disbursed in draws as construction progresses. Upon completion, it either converts to a permanent mortgage or is paid off with separate financing.
Construction-to-permanent loans have one closing for both construction and permanent financing, simpler and lower total costs. Two-time close involves separate construction and permanent loans with two closings, more flexibility to shop rates but higher costs.
Yes, both FHA and VA offer construction loan programs, though fewer lenders offer them. FHA requires 3.5% down; VA offers zero down for qualified veterans. These programs have specific builder and property requirements.
Construction loan rates are typically higher than traditional mortgages, usually prime rate plus 0.5% to 2%. You pay interest only on disbursed funds during construction. Permanent rates are set at closing or conversion depending on the program.
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