A construction loan is a short-term loan that finances the building of a new home. Unlike a standard mortgage that is funded in a lump sum, construction loan funds are released in stages called draws as construction milestones are completed. When construction is finished, the loan either converts to a permanent mortgage (one-time close) or is paid off with a new permanent mortgage (two-time close).
One-Time Close vs. Two-Time Close
The most important decision in construction financing is whether to use a one-time close or two-time close structure.
| One-Time Close | Two-Time Close | |
|---|---|---|
| How it works | Single closing covers both construction and permanent loan | Separate closings for construction and permanent mortgage |
| Closing costs | Paid once | Paid twice |
| Rate lock | Rate locked at initial closing | Rate not locked until permanent loan closes |
| Complexity | Simpler, one process | More complex, two full loan processes |
| Best for | Borrowers who want certainty and lower total costs | Borrowers who want flexibility to shop rates after construction |
One-time close is available through VA, FHA, USDA, and conventional programs.
How Construction Draws Work
Construction loan funds are not released all at once. Instead, the lender releases funds in draws tied to verified construction milestones. Foundation completion, framing, rough mechanicals, drywall, and final completion are common milestones. Before each draw, the lender typically sends an inspector to verify work is complete. During construction, the borrower typically pays interest only on the funds drawn, not the full loan amount.
The VA Single-Close Construction Loan
Eligible veterans can build a home with no down payment using the VA single-close construction loan. The VA program combines construction financing and a permanent VA mortgage into one loan with one closing. The VA funding fee applies as it does on a standard VA purchase. This is one of the most powerful and least-known benefits available to veterans: the ability to build a custom home with zero down payment.
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