A $475,000 construction-to-perm loan illustrates why planning matters before the first shovel hits dirt. At 6.75%, the estimated 30-year principal-and-interest payment after conversion is about $3,081 per month. If a later permanent-loan option at 6.25% produced a $2,924 payment, that is a $157 monthly difference and roughly $9,420 over five years, before taxes, insurance, or changes in balance. The point is not to chase a hypothetical rate. It is to build the financing plan as carefully as the house plan.
This construction loan process guide is for buyers who want a custom home without getting surprised by draw schedules, appraisal limits, credit requirements, or cash reserves halfway through the project. In Richmond, Glen Allen, and Short Pump, well-priced buildable lots can still draw competition even when resale inventory gives buyers more choices. A construction loan needs a little more patience than a standard purchase loan, but the process is manageable when the broker, builder, and borrower are working from the same numbers.
Duane Buziak, NMLS #1110647
Table of Contents
- What a construction loan actually funds
- Step-by-step construction loan process
- Credit, cash, and appraisal numbers to plan for
- Draws, inspections, and construction timing
- Construction-to-perm and future refinance choices
- Eight common questions
What a construction loan actually funds
A construction loan finances the land, approved plans, labor, materials, permits, and a contingency reserve under one project budget. Most owner-occupied programs are structured as construction-to-permanent financing: the short construction phase transitions into a long-term mortgage when the home is complete. That can reduce duplicate closings, though the pricing, rate-lock period, and builder requirements vary by program.
The key number is not only the contract price. It is the completed-value appraisal, often called the “as-completed” value. If the lot costs $100,000 and the build contract is $475,000, the total project may be $575,000 before reserves and closing costs. If the appraisal supports $600,000, there may be room for the transaction. If it supports only $550,000, you may need more cash, a lower-cost plan, or a different structure.
For local context, the Realtor.com July 2025 market report put Henrico County’s median listing price at approximately $450,000. That is a useful market reference, not an appraisal. New construction in areas near Short Pump or Glen Allen can command a premium for lot location and finishes, while the appraisal still has to be supported by comparable sales.
The construction loan process, step by step
Start with the lot and builder, not a floor-plan wish list
A broker will want the signed or proposed construction contract, architectural plans, specifications, lot details, builder license information, insurance, budget, and timeline. The builder usually must meet program requirements and be approved before closing. A beautiful plan from an unapproved builder is not yet a financeable project.
Ask whether the contract clearly identifies allowances for cabinets, flooring, fixtures, site work, and utility connections. Vague allowances are where a manageable project can become an expensive one. I prefer a budget with a real contingency line, often 5% to 10% of hard construction costs, rather than optimism dressed up as a number.
Get prequalified without spending a credit inquiry too early
A soft credit pull mortgage review can help estimate your buying range without a hard inquiry. A soft pull mortgage broker can review score range, liabilities, income structure, and likely payment before you commit money to plans or a lot. That is useful for buyers asking for a no hard inquiry mortgage pre approval or a mortgage pre approval without hard pull.
Be clear about the distinction: a no credit hit mortgage application can be a strong early screening tool, but full underwriting may require a hard credit inquiry and complete documentation before closing. Credit standards depend on the program, occupancy, down payment, debt-to-income ratio, and reserves. A 680 score is often a more comfortable starting point for many conventional construction scenarios, while some FHA options may permit lower scores with tighter underwriting. Strong credit does not replace adequate cash reserves.
Self-employed buyers should expect to provide two years of personal and business tax returns when applicable, current profit-and-loss information, bank statements, and explanations for large deposits. Investors using DSCR financing should expect the property cash-flow analysis to be central, although ground-up construction programs have different rules from a standard finished-rental DSCR loan.
Appraisal and underwriting determine the real loan amount
The appraisal uses the plans, specs, lot, and comparable completed homes to estimate value when the property is finished. Underwriting then reviews income, assets, credit, title, insurance, and the builder package. Conventional loan limits also matter. For 2026, confirm the applicable county conforming limit before choosing a structure, because high-cost county limits differ from the baseline limit and are updated annually by the FHFA.
A practical cash target includes your down payment, estimated closing costs, and reserves. Construction closing costs often run roughly 2% to 5% of the loan amount, depending on title work, appraisal complexity, inspections, prepaid items, and program structure. On a $475,000 loan, that is approximately $9,500 to $23,750. Many programs also want several months of housing-payment reserves after closing. Six months of reserves is a sensible planning benchmark for a more complex file, though the actual requirement can be lower or higher.
Draws, inspections, and timing are where projects succeed or stall
Construction funds are released in draws as work is completed. Before each draw, the project normally needs an inspection confirming that the stated stage is finished. The builder receives funds according to the approved draw schedule, not simply because the calendar says another month has passed.
During construction, payments are commonly interest-only on funds actually disbursed. That means the payment rises as the balance is drawn. On a 6.75% rate, a $200,000 outstanding balance has estimated monthly interest of about $1,125. At the full $475,000 balance, monthly interest is about $2,672. Your exact payment depends on the note terms and draw timing, but buyers should budget for the increase rather than assuming the early payment lasts all year.
Delays happen. Weather, permit revisions, utility work, material availability, and change orders can extend a project. In markets where builders are balancing several active homes, a realistic timeline matters more than the fastest estimate in a sales meeting. Keep enough reserves to handle a delayed certificate of occupancy and avoid major changes after the appraisal is ordered unless the budget and value support them.
Build now, then know your refinance choices
A construction-to-perm loan may already convert into your permanent financing. If it does not, or if a rate-and-term refinance later makes sense, compare the purpose of the refinance before comparing only the rate.
| Feature | Rate-and-term refinance | Cash-out refinance | IRRRL |
|---|---|---|---|
| Primary purpose | Replace rate, term, or both | Replace financing and access eligible equity | Streamline an existing VA loan |
| Cash back at closing | Generally limited to minor adjustments | Available when equity and program rules allow | Generally limited to permitted minor adjustments |
| Maximum LTV reference | Program and occupancy dependent | Up to 90% conventional; up to 100% VA when eligible | Program rules apply to the existing VA loan |
| Documentation | Income, assets, credit, and appraisal as required | Income, assets, credit, appraisal, and cash-out review | Often reduced documentation, subject to eligibility |
| Best fit | Lower payment or a revised payoff timeline | Planned use of equity with payment capacity | Eligible VA homeowner seeking a streamlined change |
Here is the break-even math I want every homeowner to see. Suppose a rate-and-term refinance has $6,800 in total closing costs and reduces the principal-and-interest payment by $142 per month. $6,800 divided by $142 equals 47.9 months. The break-even point is 48 months. If you expect to keep that loan longer than four years and the overall terms fit your goals, it deserves a closer look. If you expect to sell in two years, it may not.
Ask about our no-out-of-pocket closing options, but read the trade-off. Costs may be paid through a higher rate, seller credit where permitted, or added loan balance depending on the transaction. They do not disappear.
Construction loan FAQ
1. How much down payment is needed for a construction loan?
It depends on program, credit, appraisal, land equity, and occupancy. Some borrowers use owned land equity toward the required investment; others bring cash to closing.
2. Can I use a soft pull before applying?
Yes. A soft credit pull mortgage review can help you plan without an initial credit-score impact. Full approval can still require a hard inquiry later.
3. Do construction loans require a higher credit score?
Often, yes. Construction files have more moving parts. A 680 score is a useful planning benchmark for many conventional options, but it is not a universal minimum.
4. What happens if the builder goes over budget?
You may need contingency funds, approved change-order financing, or a revised scope. Do not assume the loan amount automatically increases.
5. Are payments made during construction?
Usually yes, often as interest-only payments on the amount drawn. Payments generally rise as more funds are disbursed.
6. Can I buy the lot separately first?
Sometimes. The cleanest route depends on whether the lot is owned, financed, or being purchased with the construction transaction.
7. What if the appraisal comes in low?
You can bring additional funds, renegotiate costs, revise the plan, or explore whether a different program structure fits. The numbers must work before closing.
8. When should I start the process?
Start before making a nonrefundable lot deposit or signing a final build contract. Early review gives you time to protect your options.
Construction financing rewards preparation, not speed for its own sake. Get the lot, builder, budget, credit, reserves, and completed-value appraisal pointed in the same direction, and the process becomes far less intimidating.
Legal disclaimer: This material is for educational purposes only and is not a commitment to lend, an approval, or a guarantee of terms. Rates, fees, eligibility, credit standards, appraised value, and program availability can change without notice. Construction financing involves builder approval, inspections, draw requirements, and underwriting conditions. Duane Buziak is licensed to originate mortgage loans in Virginia, Florida, Tennessee, Georgia, and DC only. Consult appropriate tax, legal, construction, and insurance professionals for advice specific to your situation.
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.