Compare Structures
Construction Loan Types, Compared
"Construction loan" isn't one product — it's a category with a few meaningfully different structures. Here's how the three most common types work and who each one tends to fit.
The Three Structures
Which One Applies to Your Build?
Construction-to-Permanent Loan
Most CommonA single loan that covers the build phase and then converts into a standard long-term mortgage once the home is finished — one application, one approval, and typically one closing.
How It Works
You close once, before construction starts. During the build, the lender releases funds in draws as milestones are completed, and you generally pay interest only on the amount drawn so far. When the home passes final inspection and gets its certificate of occupancy, the loan automatically converts to a permanent, amortizing mortgage — no second application and no second closing in most cases.
Best For
Borrowers who want the simplicity of a single closing and want to lock in their permanent-mortgage terms (or at least the structure of that conversion) up front, before construction begins.
Worth asking about: Because you're committing to the permanent loan structure at the start, compare how the lender handles the conversion — some allow a rate reset or float-down at conversion, others lock the permanent rate at closing. Ask specifically how your lender's product handles this.
Standalone (Two-Time-Close) Construction Loan
Two ClosingsA short-term loan that covers only the construction period. Once the home is complete, you separately apply for and close on a new permanent mortgage to pay off the construction loan.
How It Works
You close on the construction loan, draw funds in stages as the build progresses (again, typically interest-only on the drawn balance), and pay it off in full — usually within 12 months — once the home is done. You then shop for and close on a separate permanent mortgage. That means two applications, two sets of closing costs, and two underwriting reviews instead of one.
Best For
Borrowers who want flexibility to shop the permanent mortgage market separately once the home is built and appraised at its finished value, or whose plans might still change during the build.
Worth asking about: Two closings generally means two rounds of closing costs. You'll also need to re-qualify for the permanent mortgage after construction, so your financial picture (income, credit, other debts) at that later date matters — not just at the start.
Owner-Builder Construction Loan
Narrower PoolA construction loan where the borrower acts as their own general contractor instead of hiring a licensed GC to run the project — a narrower, harder-to-qualify-for category most lenders treat differently.
How It Works
The structure (draws, inspections, interest-only build phase) is similar to a standard construction loan, but underwriting is stricter. Because the lender isn't relying on a licensed, bonded, lender-approved general contractor to deliver the project, they typically want documented construction or project-management experience from the borrower, a detailed budget and timeline, and sometimes a larger contingency reserve.
Best For
Borrowers with genuine, documented construction, trades, or project-management experience who plan to manage subcontractors themselves rather than hire a general contractor.
Worth asking about: Many retail lenders don't offer owner-builder construction loans at all, or only through specific programs — it's a smaller lender pool than standard construction-to-permanent or standalone loans. If you don't have documented experience, most lenders will require you to hire a licensed GC instead.
CustomHomeLoan.co is an independent informational resource and lead-connection service — not a lender, mortgage broker, bank, or credit union. We do not originate, underwrite, service, or fund loans. Loan terms, rates, down payment requirements, draw schedules, and qualification standards vary by lender, loan program, and borrower and are set solely by the lending institution you ultimately work with. Nothing on this site is a loan offer, a rate quote, a commitment to lend, or a guarantee of financing. Always confirm current terms, requirements, and availability directly with a licensed lender before making a financial decision.
Not sure which structure fits your project? Tell us about your build and we'll help point you toward financing options that match.
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Every lender structures these three loan types a little differently. Tell us about your build and we'll connect you with financing options worth comparing.