Questions to Ask a Lender About a Construction Loan
For anyone planning to build a house and talking to a bank, credit union or mortgage lender about a construction loan before applying. The list runs in the order the conversation usually does: the loan and the lender, the down payment and how your land counts, the rate and closing costs, the draw schedule, the builder and the budget, and what happens if the build runs late or when the loan converts. Loan rules differ by lender, state and country, so where a note calls something usual, confirm it with the lender in front of you.
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The questions
Each question, and why to ask it
Loan and lender
Is this a construction-to-permanent loan with one closing, or a stand-alone construction loan that I pay off with a separate mortgage?
Why ask it
Everything else in the conversation hangs on this fork. One closing generally means one set of closing costs and a mortgage already arranged, while two closings mean you apply and pay again when the house is done but can shop for the mortgage at that point. If the lender writes both, have them price both on your numbers.
How many construction loans for owner-occupied homes did you close in the past year, and who runs them after closing?
Why ask it
Plenty of banks and brokers that write ordinary mortgages rarely touch a construction loan, or hand it to another desk. A lender that does them every month already has a draw department and inspectors it uses. If the count is a handful, find out who will actually process your draws.
How long is the construction period on this loan, and does the clock start at closing or when work begins?
Why ask it
Set the answer beside the schedule your builder gave you, then add the margin the builder would not. When the clock starts at closing, weeks spent waiting on a permit or a foundation crew come out of your term. A period shorter than the builder's honest estimate means you are planning on an extension from day one.
What kinds of mortgage can this loan convert into: fixed or adjustable, which lengths, and any government-backed programs?
Why ask it
Some lenders convert only into one or two of their own products. In the United States a smaller group also writes FHA, VA or USDA construction loans, each with its own builder and down payment rules, so if you were counting on one of those, name it now. Learning at conversion that the program you planned around was never on the menu leaves no time to go elsewhere.
If I take a stand-alone construction loan, what happens if I cannot get the mortgage when the build ends?
Why ask it
A stand-alone loan falls due on its date whether or not a mortgage is waiting for it. Hear what this lender has done in that spot before: extended the loan, offered a mortgage of its own, or asked for payoff. That risk is the price of the two-closing route, so weigh it against whatever the route saves you.
How long does it take to get from application to closing on a construction loan, and what usually holds it up?
Why ask it
A construction file has more steps in a row than a purchase does: your approval, the builder's review, an appraisal from plans, then title work on the lot. Pass the estimate to your builder, because many bids are only good for a set number of weeks. If the hold-up they name is something you control, such as a finished specification sheet, start on it today.
Are there kinds of homes or lots you will not finance, such as modular, log or kit homes, barndominiums, or rural acreage?
Why ask it
Describe your project in one sentence and ask for a plain yes or no. Unusual construction and large parcels are hard to appraise, and many lenders decline them for that reason alone. A no on the first call costs nothing; a no after you have paid for an appraisal does.
Do the building permits have to be issued before we close, or can we close while the application is still in review?
Why ask it
Either answer has a cost. Closing before the permit can leave you paying interest and using up the construction period while a plan reviewer works through the drawings. Waiting for the permit can outlast your approval or a rate lock, so ask how long each of those stays good.
Does it matter if any work has started on the lot before we close, such as clearing, a driveway or a delivery of materials?
Why ask it
Many lenders want the site untouched until their loan is recorded, because work done earlier can let a contractor's claim rank ahead of the bank's. How that works depends on the law where the land is, so get this lender's rule before anyone brings a machine onto the lot. If something has already been done, say so on the first call and hear what they would need to go ahead.
Down payment and approval
What is the minimum down payment, and is it figured on the cost to build or on the appraised value of the finished house?
Why ask it
Many lenders work out both a loan-to-cost and a loan-to-value figure and lend on whichever gives the smaller loan. The basis changes how much cash you need, sometimes by a lot. Hand over your land price and build budget and ask for the down payment in dollars, not a percentage.
I already own the lot. How does my land equity count toward the down payment?
Why ask it
Lenders often treat equity in the lot as money you have already put in, and it can cover part or all of the down payment. The follow-up decides how much it is worth: do they use what you paid or today's appraised value, and does that depend on how long you have owned it?
I still owe money on the land. Will this loan pay that off, and what does it do to my equity?
Why ask it
A construction lender nearly always wants to be first in line on the property, so an existing land loan is usually paid off at closing out of the new one. Your equity is then the lot's value less that payoff. The figure to leave with is the cash to close with the payoff already counted in.
I have not bought the lot yet. Can the land purchase be part of this loan?
Why ask it
Where the answer is yes, the lot and the build close together, which means plans, a builder and a budget have to be ready before the seller is paid. Find out how many weeks that takes and whether the seller will wait. If not, ask what a separate lot loan would look like and how it folds in later.
Can you pre-approve me before I have final plans or a signed builder contract, and what turns that into a full approval?
Why ask it
A pre-approval rests on your income, credit and savings. The full approval also needs the project, which usually means plans, a specification sheet, a signed contract and a line-item budget. Get that second list in writing, hand the builder their half of it the same day, and check how long the pre-approval lasts, since drawings and bids can outlive it.
What credit score, income and debt levels do you want for a construction loan, and do you count my current rent or mortgage during the build?
Why ask it
With no finished house to lend against, construction loans tend to be underwritten more tightly than a standard purchase. The squeeze is usually the overlap: your present housing payment plus interest on the build. Have them put your own figure beside each limit, so you can see which one is tight.
After the down payment and closing costs, how much do I need left in reserves?
Why ask it
A requirement stated in months of payments is common, and a build is exactly when savings get used. Three details change the answer: which accounts count, whether retirement money is discounted, and whether the reserve has to sit untouched until the loan converts.
Do I have to sell my current home before the loan converts, and what if it has not sold by then?
Why ask it
If the approval assumed your old mortgage would be gone, an unsold house at completion can stall the conversion. Have the lender say which way they qualified you: carrying both homes, or only the new one. The second is cheaper to qualify for and riskier in a slow market.
How do you appraise a house that does not exist yet, and what happens if the value comes in below the cost to build?
Why ask it
The appraiser typically works from the plans, the specifications and recent sales of similar homes, and gives a value as if the house were complete. Where few new custom homes have sold nearby, that value can land under your budget, and the gap becomes more cash from you or a smaller plan. A lender who has watched recent builds in your area go through appraisal can tell you how they came in, which is worth hearing before you pay for final drawings.
Rate and costs
What is the interest rate during construction, and is it fixed or tied to an index?
Why ask it
Build-phase rates are frequently variable: a benchmark such as the prime rate plus a margin. Get the index, the margin and any cap, then have them work out a month of interest on the fully drawn balance at today's rate and at two points higher. That second figure is your stress test.
Do I pay interest only on the money drawn so far, and what will the payments be month by month?
Why ask it
Interest-only on the drawn balance is the usual arrangement, so the first payments are small and the last ones are the largest. Those last months are also when you may still be paying rent or a mortgage elsewhere. A lender with your builder's draw schedule in hand can sketch the whole curve for you.
Can the interest be paid from an interest reserve inside the loan instead of out of my pocket?
Why ask it
A reserve frees up your monthly cash, and it is still borrowed money: it raises the loan amount and you pay interest on it. The detail to press on is what happens when the build runs long and the reserve is empty. If the payments become yours at that point, you want the monthly figure now.
When is the rate on the permanent mortgage set: at the first closing, or when the loan converts?
Why ask it
This tells you who carries a year of rate movement. A rate fixed at closing protects you if rates climb and usually costs something for the privilege; one set at conversion costs nothing today and leaves the risk with you. Where both are on offer, have each priced on the same day.
If I lock the permanent rate up front, how long does the lock last, what does it cost, and can I take a lower rate if the market drops?
Why ask it
Long locks tend to carry a fee or a slightly higher rate, so ask whether any of it is credited back at conversion. The option to move down is often called a float-down, and its conditions matter more than its name: how many times, inside what window, and how far rates must fall first.
What are the closing costs on this loan, line by line, and which ones exist only because it is a construction loan?
Why ask it
Alongside the origination, appraisal and title charges of any mortgage, a construction loan can add plan review, inspections, draw administration and title updates. Ask for the written estimate and mark the construction-only lines. Those are the ones that differ most between lenders and that a rate comparison never shows.
With two closings, which costs would I pay a second time, and do you discount them if I come back to you for the mortgage?
Why ask it
Origination, appraisal, title and recording charges can all repeat at the second closing. Some lenders reduce their own fees for a returning construction borrower, and a discount is only real once it is on paper. Add both closings together before comparing against a single-close offer with a higher rate.
If I refinance or sell soon after the loan converts, is there a prepayment penalty, or would I owe back any lender credits?
Why ask it
Raise this if rates are high now and you expect to refinance once the house is finished. Some loans carry a prepayment charge or take back lender credits when the loan is paid off inside a set period. Get the length of that period and the amount.
Draws
Who sets the draw schedule, you or my builder, and can I see the one you would use?
Why ask it
The lender has a standard schedule and the builder has payment terms in the contract, and the two are written by different people. Wherever they disagree, the builder is asking for money the bank will not release yet, and the difference comes from you. Lay them side by side before you sign either document.
What has to be in hand before each draw is released: an inspection, invoices, lien waivers, my signature?
Why ask it
Every item on that list is something that can hold up a payment. Ask who gathers the waivers from subcontractors and suppliers, and whether you approve each draw yourself. Signing every one is a chore, and it is also the one moment you can check that the money is following the work.
Who inspects the work before a draw, and what exactly are they checking?
Why ask it
A draw inspector is usually confirming how much of the budget has been built, not whether it was built well or to code. Knowing that tells you whether to hire your own inspector at foundation, framing and before drywall. Copies of the lender's reports are worth requesting either way, since they put a date on each stage.
From the builder's request to money sent, how many business days does a draw take?
Why ask it
Give this number to your builder before the contract is signed, because slow draws are a common reason crews leave for another job. Then ask what causes the slow ones here. If the answer is inspector scheduling, a request made a few days before a stage finishes can close the gap.
Is the money paid to the builder, to me, or to both of us, and can a supplier or subcontractor be paid directly?
Why ask it
Joint checks and direct payments give you more control and add a step to every draw. The follow-up is what the lender does when a supplier says it has not been paid, since in many places an unpaid supplier can file a claim against the property even though the builder received the money.
Will you fund a deposit to the builder, or pay for materials that have been ordered but not yet installed?
Why ask it
A lot of lenders release money only for work in place. Builders often want a deposit to start, and windows, trusses and cabinets may need paying for months before they arrive. If the lender says no to both, that money comes from you, so settle it before you agree to the builder's payment terms.
Does my own cash have to be spent first, before any loan money is released?
Why ask it
Borrower funds first is a common rule, and it changes your planning: the cash leaves at the start instead of being spread across the build. Land equity sometimes counts as money already in. If it does here, the first loan draw may come sooner than you expect.
How many draws does the loan allow, is there a minimum amount, and what is the fee for each draw and inspection?
Why ask it
Set the allowance beside the number of payments in your builder's contract: where the builder bills more stages than the loan covers, the extra ones have nowhere to come from but you. Then total the draw and inspection fees across the whole build and add them to the closing costs you are comparing. A stage that fails inspection means a second visit, so find out who is charged for it.
Do you hold back a percentage of each draw until the house is finished?
Why ask it
This holdback is often called retainage, and it works in your favor: it keeps the builder interested in the last small jobs. It has to match the builder's contract, though, so raise it with both sides. What releases it varies, from an occupancy certificate to final waivers to your own sign-off.
How will I see what has been drawn against each line of the budget, and can money be moved between lines?
Why ask it
A ledger by budget line shows trouble early, such as the framing money being gone while the framing is not. Ask whether you can view it online or have to request a statement. Moving money from one line to another usually needs the lender's approval, so learn who gives it and how long it takes.
Builder and budget
Does my builder have to be approved by you, and what will you ask them for?
Why ask it
Typical requests are a license, insurance certificates, references, a list of finished homes and sometimes financial statements. Tell your builder early, since the review can take weeks. If the lender has financed this builder before, ask whether they would do it again; a plain yes is worth more than any reference the builder picks.
Can I act as my own general contractor, or do part of the work myself?
Why ask it
Many lenders will not make an owner-builder loan at all, and others want proof that you build for a living. Where it is allowed, ask how your labor is valued in the budget and whether a draw pays for materials only. Unpaid work rarely counts as a down payment.
What kind of contract do you want between me and the builder: fixed price, cost plus, or either?
Why ask it
Some lenders accept only a fixed price, because a cost-plus contract leaves the final figure open and the loan amount does not move with it. Settle this before you sign with the builder. If cost plus is accepted, ask whether it needs a maximum price written in.
Which costs can go into the loan budget besides the house itself: design fees, permits, utility connections, a driveway, landscaping, appliances?
Why ask it
Lenders draw this line in different places, and whatever falls outside it is paid in cash on top of your down payment. Go through the builder's budget with the lender one line at a time instead of accepting 'most things'. If you have already paid for plans or a survey, find out whether that spending is credited toward your share.
Do you require a contingency in the budget, how large, and whose money is it?
Why ask it
Lenders often want a contingency line, set as a percentage of the construction cost. Three details follow from it: whether it can be financed or has to be cash, who approves spending it, and where it goes if it is never touched. Unspent contingency that simply lowers the loan is the cleanest outcome.
If the build goes over budget, will you increase the loan, or does every dollar of overrun come from me?
Why ask it
The loan amount is normally fixed at closing because it rests on the appraisal, so an increase means a fresh approval and possibly a fresh valuation. That is why overruns and upgrades usually end up paid in cash. The timing matters as much as the amount, since some lenders want the money deposited before they release the next draw.
How do change orders work with the loan once building has started?
Why ask it
A change that adds cost may need the lender's consent and your money up front, and one that alters the plans can touch the appraised value. Find out what size of change the lender wants to hear about. Then pass that threshold to the builder so nothing is agreed on site that the bank later refuses to recognize.
What insurance has to be in place before the first draw, and who buys it: me or the builder?
Why ask it
The policy that covers the structure and materials while work is under way is usually called builder's risk or course of construction coverage. Who buys it differs by lender and by builder, and the limits are the lender's to set, so have those sent to you and to whoever is arranging the policy. Find out as well at what point it has to be swapped for a homeowner's policy, because a gap between the two is a gap in coverage.
Delays and finish
If the house is not finished when the construction period ends, what are the extension terms?
Why ask it
Have the lender spell out the fee, the length of each extension, how many you can have and whether the rate changes. Then ask the harder version: has this lender ever declined to extend, and what happened to the borrower? Weather, permits and back-ordered windows make a late finish ordinary, not exceptional.
If the build runs past my rate lock, what does extending the lock cost, and does it matter whose fault the delay was?
Why ask it
Expect the lender to bill you whoever caused the delay. Whether you can recover any of it depends on the delay clause in your builder's contract, a separate document the lender has no stake in. Read that clause with the extension fee in front of you.
What counts as finished for the loan to convert: an occupancy certificate, a final inspection, final lien waivers?
Why ask it
The checklist sets the day your regular mortgage payments begin and the day a rate lock has to be used. Bring up the items a season can hold up, like a driveway or grading. Some lenders will convert with money set aside for those, and others wait until everything is done.
Will you check my credit, income and employment again before the loan converts?
Why ask it
On a single-close loan the answer is sometimes no, and sometimes there is a quiet re-verification shortly before conversion. A build can last a year, long enough for a job change or a car loan. If they look again, treat your finances as frozen until the day it converts.
Is the house appraised or inspected again at completion, and what do I sign or pay for the loan to convert?
Why ask it
A final visit to confirm the house was built to the plans is routine. What you want to know is whether a new value could change your rate, your loan amount or any mortgage insurance. On the paperwork, a short modification is a very different event from a second closing, so have them name which one it is.
If the house costs less than the loan, or money is left undrawn, what happens to it?
Why ask it
Leftover funds generally reduce what you owe; they do not come to you as cash. Check that the permanent payment is worked out on the amount actually drawn. If you had hoped to use a surplus for landscaping or appliances, ask whether those can be written into the budget from the start.
What happens to the loan if my builder walks off the job or goes out of business partway through?
Why ask it
This is the uncomfortable question, and any experienced construction lender has lived it. Ask what they did last time: how a replacement builder was approved, how the remaining money was re-budgeted, and whether draws were frozen meanwhile. You are hearing how they behave when a loan goes wrong.
Who is my contact after closing, and how do I reach them when a draw is stuck?
Why ask it
A loan officer's part is mostly over at closing, and the following year belongs to a draw administrator you may never have met. Get that person's name and direct line before you sign, and put them in touch with the builder's office. A stalled draw is solved faster by two people who have already spoken.
What goes wrong most often on the construction loans you handle, and what would you do differently in my position?
Why ask it
Keep this for the end, once the lender knows your project. Someone who works with these loans every week will name specifics: budgets with no contingency, appraisals that fall short, permits that take a season. A general answer about staying in touch suggests they have not seen many through to the end.
How to talk to a lender about a construction loan
Practical guidance for the conversation itself
What to have ready before the first conversation
A project the lender can picture
You do not need final drawings to make the first call, but you do need a lot or an address, a rough size, a builder in mind and a budget figure. With those four things a lender can tell you whether the project fits and what the down payment would be. Without them you will get a brochure answer.
Your land position in one line
Write down what you paid for the lot, when you bought it, what you still owe on it and what you think it is worth now. How a lender treats land equity turns on exactly those facts, and the answer can change your cash requirement more than the interest rate does.
The monthly figure you can carry
Work out what you can pay each month on top of your present housing for as long as the build lasts, and then for three months more. That number tells you whether you need an interest reserve and how much a delay would hurt, and it is a better guide than the maximum loan you are offered.
More than one kind of lender
Construction lending is a specialty, and local banks, credit unions and national lenders can treat the same project quite differently. Ask your builder which lenders have paid their draws on time, then call at least one the builder did not name. How it works, and what is on offer, depends on where you are building, so ask each lender what is usual there.
Comparing two construction loan offers
One closing against two, in total dollars
For each offer, add every closing cost across the life of the project, including a second closing if there is one, then add the interest you expect to pay during the build. A single-close loan with a slightly higher rate can still be the cheaper path, and the reverse is also true. Only the totals show which.
The same build schedule for both
Give both lenders the builder's draw schedule and ask each for the month-by-month interest. Then ask each to run it again with the build taking three months longer. Offers that look alike on a punctual build can sit far apart on a late one, once extension and lock fees are counted.
The draw process, not only the price
Put the number of business days per draw, the per-draw fees and the rule on deposits and stored materials next to the rate. A lender that costs a little more and pays in three days may suit your builder far better than a cheaper one that takes two weeks. Ask your builder to read both draw procedures.
What each lender left blank
Go back over your notes and look for the questions that got "it depends" or "we can talk about that later". Send those again by email and ask for a written reply. The answers that are hardest to get in writing are usually extensions, overruns and what happens at conversion.
Words you will hear and what to ask about each
Loan-to-cost and loan-to-value
Loan-to-cost compares the loan with what the project costs, land included. Loan-to-value compares it with what the appraiser says the finished house will be worth. Ask for the lender's limit on each and which one is setting your loan amount.
Draw
A draw is one release of loan money for a stage of work that has been completed. The schedule of draws is normally settled before closing. The thing to ask is what evidence each draw needs and how many days it takes.
Interest reserve
An interest reserve is an amount added to the loan and used to pay the interest during construction, so nothing is due from you monthly while it lasts. Ask how it was sized and what happens when it runs out.
Conversion or modification
On a single-close loan, this is the point where the construction phase ends and the long-term mortgage begins. Ask what triggers it, what is checked again beforehand and what you sign.
Retainage
Retainage is a share of each payment held back until the job is complete. Ask the percentage, whether the builder's contract carries the same figure and what has to happen for the money to be released.
After the loan closes
Keep your own running total
After every draw, note the date, the amount, the stage it paid for and what is left in the loan. Compare the share of money spent with the share of the house that is standing. When the first number pulls ahead of the second, call the builder and the lender that week.
Walk the site before you approve
If your signature is needed on a draw, visit first and look for the work the request describes. You are not judging workmanship, only checking that the stage being billed is the stage you can see. Take dated photographs each time; they settle arguments later.
Report a delay while it is still small
Tell the lender as soon as the builder moves the finish date, not when the construction period is about to end. An extension requested two months ahead is paperwork. One requested in the final week is a negotiation you are having from a weak position.
Change nothing in your finances
Until the loan has converted, avoid new debt, large unexplained deposits and job changes you can postpone. If one cannot be avoided, tell the lender before it happens and ask how it affects the conversion.