Construction Mortgage Loans

A one-time close construction loan finances your lot, your build, and your permanent mortgage in a single closing. You sign once, before ground breaks, and the loan converts to permanent financing when the house is finished — with no second application and no requalification. Most articles about this product stop at that sentence. The parts that actually determine whether your build goes smoothly are the draw schedule, the subject-to-completion appraisal, and who funds a change order, so that's what this page covers.

What a One-Time Close Construction Loan Is

A one-time close construction loan is a single mortgage that funds land acquisition, construction, and permanent financing under one closing. It is also called a single-close loan or a construction-to-permanent loan. The alternative — a two-time close — treats construction and the permanent mortgage as two separate transactions with two closings, two sets of documents, and two credit approvals.

The difference sounds administrative. It isn't. Under a two-time close, you have to qualify a second time once the house is built, using whatever your income, credit, and the rate environment look like at that point. If anything has moved against you during a twelve-month build, that's your problem to solve while standing in a finished house you can't yet finance.

General structural comparison for educational purposes. Program availability, terms, and eligibility vary by lender, property type, and state, and are subject to change. All loans subject to credit approval.

How the Draw Schedule Actually Works

Construction funds are released in stages called draws, each one triggered by verified completion of a defined phase rather than by a date on a calendar. You are not handed the full loan amount at closing, and your builder is not paid in advance.

The sequence on a typical custom build runs roughly like this:

1. Lot funding at closing. If you're purchasing the land as part of the loan, that portion funds first. If you already own the lot free and clear, its value is generally treated as equity in the project.
2. Foundation and site work. Excavation, footings, slab or stem wall.
3. Framing and dry-in. Structure up, roof on, windows set — the phase that makes the building weather-tight.
4. Mechanical rough-in. Plumbing, electrical, and HVAC installed and inspected before walls close.
5. Interior finish. Drywall, cabinetry, flooring, fixtures, paint.
6. Final draw at certificate of occupancy. Released after final inspection and the local jurisdiction signs off.

Each draw request triggers an inspection to verify percentage of completion, and lien waivers are collected from subcontractors so the title stays clean. You pay interest only on the balance actually disbursed, which is why the payment in month two is much smaller than the payment in month ten.

The practical implication most borrowers miss: your builder must be able to carry costs between draws. A thinly capitalized builder who needs money before a phase is verifiably complete will create friction on your project. That's a real reason to care who you hire, separate from the quality of their work.

The Appraisal on a House That Doesn't Exist

Your construction loan is underwritten against a subject-to-completion appraisal — a valuation of a home that hasn't been built, based on your plans, specifications, and finish schedule compared against completed comparable sales. This is the single most common place a construction file runs into trouble, and almost nobody warns you about it in advance.

The appraiser is answering one question: if this house were finished today exactly as drawn, what would it be worth? If that number comes in below your total project cost, you have a gap, and the gap is generally yours to cover in cash. Three situations produce it most often:

• Over-improving for the neighborhood. A build that will be the most expensive home on its street has fewer comparable sales supporting it.
• Specification-heavy custom finishes. Highly personal upgrades frequently cost more than they appraise for.
• Thin comparable data. New master-planned areas and semi-rural lots can lack recent finished-home sales to draw from.

The way to manage this is to have the plans, specifications, and builder's contract reviewed before you commit — not after you've signed with a builder and put money down. That review costs nothing and it is the highest-value hour in the entire process.

Change Orders and Cost Overruns

A contingency reserve is money built into your project budget at closing to absorb cost increases during the build. It is not optional padding — it is a structural part of how construction loans are sized, and a project budgeted with no contingency is a project that will need cash from you the first time something moves.

Things do move. Material prices change between contract and framing, a soils report comes back requiring engineering nobody anticipated, or you decide midway that you want a different kitchen. How those get funded depends on what the change is:

• Cost increases within contingency are generally absorbed by the reserve without restructuring anything.
• Borrower-elected upgrades — the different kitchen — are typically funded by you in cash, because they increase project cost without a corresponding change to the approved loan amount.
• Changes exceeding contingency may require a formal review, and in some cases a new appraisal if the scope has materially changed.

The contract type matters here too. A fixed-price contract puts overrun risk largely on your builder. A cost-plus contract puts it largely on you. Neither is automatically wrong, but you should know which one you signed before the first change order arrives.

What Happens at Conversion

At completion, the loan converts from a construction facility to a permanent mortgage through a modification — not a refinance. That distinction is the entire point of the product, and it's the part that saves you the most trouble.

A refinance would mean a new application, a new credit pull, new income documentation, new title work, and a new set of closing costs. A modification means the loan you already closed changes character according to terms that were set at the original closing. You provide the certificate of occupancy and the final inspection; the interest-only construction period ends; principal and interest payments begin.

Three things worth confirming before you close on any construction loan, because they vary by program:

• How long the construction period runs, and what an extension requires if weather or permitting pushes your timeline
• How the permanent terms are established, and when they lock relative to the start of construction
• Whether builder's risk insurance is required during construction and who is responsible for placing it

Where Jumbo Construction Lending Begins

Construction financing crosses into jumbo territory at the conforming loan limit, and in Arizona that number is the same in every county. The FHFA 2026 conforming loan limit for a one-unit property is $832,750, with a national high-cost ceiling of $1,249,125. Arizona has no high-cost county — Maricopa, Pima, and Coconino all use the baseline figure.

That threshold arrives quickly on a custom build. A Paradise Valley or north Scottsdale lot plus a custom construction budget clears $832,750 without much effort, which puts the project into jumbo or super-jumbo territory and changes the underwriting posture — reserve requirements rise, documentation gets deeper, and the appraisal review is more rigorous. Portfolio jumbo construction is the work I do most, and it's the reason lot buyers in the Valley's custom corridors tend to end up on my calendar.

Below that threshold, a conventional one-time close generally applies and follows agency-adjacent underwriting. The structure of the build is identical either way; what changes is the depth of the file.

Getting Your Builder Approved

Your builder is underwritten alongside you. Lenders review the building entity, not just the borrower, because the bank is funding a project it can't foreclose on in an unfinished state without a serious problem. Builder approval is a distinct step and it can delay a closing if it starts late.

What generally gets reviewed:

• Active contractor licensing in the state — verifiable in Arizona through the Arizona Registrar of Contractors
• General liability and workers' compensation coverage
• Financial statements and a record of completed projects of comparable scope
• References and, in many cases, a resume of recent builds

Most lenders do not permit owner-builder arrangements, self-build, or a family member acting as general contractor. If that's your plan, confirm it before you go far down the road — it disqualifies a project from most construction programs outright.

My advice, from twenty years of these files: start builder approval the week you pick your builder, not the week you want to close. It is the step most likely to be sitting on someone else's desk when everything else is ready.

Frequently Asked Questions

Related: how construction loans work · jumbo mortgage loans · super-jumbo mortgage loans · conventional mortgage loans · physician mortgage loans · mortgage calculator

Ryan Lehrman, NMLS #235295. BMO Bank N.A., NMLS #401052. Member FDIC. Equal Housing Lender. All loans subject to credit approval. Terms, conditions, and eligibility requirements vary by program, property type, and state and are subject to change. This is not a commitment to lend. Rates and figures shown are for illustration only and are not an offer of credit. Content on this page is educational and is not individual financial advice; please discuss your specific situation with a licensed mortgage professional. License information is verifiable at nmlsconsumeraccess.org.