How does a construction loan work when you build a home in the Triangle?

A construction loan is a short-term loan that pays out in stages as the house goes up. With a one-time close loan, you close once and the loan turns into a regular mortgage when the house is finished. With a two-time close, you close twice and may have to qualify again. FHA, VA and USDA each have their own version, with rules about the builder and the paperwork.

What's the difference between a construction loan and a one-time close loan?

The Consumer Financial Protection Bureau describes a construction loan as usually a short-term loan for building or rehabbing a home. It says these loans generally carry higher interest rates than the longer-term mortgages used to buy homes. When building ends, the balance may be paid off in one lump sum, or the loan may convert to a regular mortgage. If it doesn't convert automatically, you may have to apply for a new loan. The CFPB advises comparing several loans, terms and features.

A one-time close loan, also called construction-to-permanent, puts both steps in one closing. Under Fannie Mae's rules for single-closing loans, the loan papers already set the permanent terms, so the loan converts automatically to a long-term mortgage when the house is done. A few points from those rules:

• No single construction period can be longer than 12 months, and the total can't pass 18 months, extensions included. Fannie Mae grants no exceptions; a longer build has to be handled as a two-closing loan.
• After conversion, the loan term can be up to 30 years, not counting the construction period.
• If you don't own the lot yet, the loan can buy the lot and pay for building. If you already own it, the loan can pay off any lot loan and pay for building.
• Before or at conversion, only four terms can change: the interest rate, the loan amount, the loan term, and a switch from an adjustable to a fixed rate.

Freddie Mac says it offers construction-to-permanent mortgages as one-time or two-time close loans. They can be paired with low-down-payment products such as Home Possible, and the construction money can cover site preparation, including removing a manufactured home.

How does the lender pay the builder while the house goes up?

The money usually comes out in a series of advances, often called draws, as building moves along, according to the CFPB. It notes that payments sometimes start six to 24 months after the loan is made. In a Fannie Mae single-closing loan, the lender manages paying the builder, contractor or other approved suppliers.

VA's Buyer's Guide explains that the leftover loan money sits in an escrow account, called a Loan in Process or draw account, that pays the builder during construction. The lender must get the veteran's written approval before each draw. A January 2024 USDA Rural Development training presentation says lenders on USDA loans manage and record draws, keep proof the work was done for each one, approve change orders, and require a fixed-price building contract.

Can we use an FHA, VA or USDA loan to build?

Yes, each has a path, with different rules.

FHA. A 2019 HUD mortgagee letter describes two programs. Construction to Permanent combines the construction loan and mortgage in one closing before building starts. Building on Own Land is a two-step close: the building is financed separately or by the builder, and an FHA mortgage pays that off after completion. You need a contract with a licensed general contractor; you can be your own general contractor only if you're licensed as one. Equity in land you already own can count toward FHA's minimum required investment. FHA's Resource Center answers questions at 1-800-CALLFHA (1-800-225-5342).

VA. A VA loan can pay to build on land the veteran owns or buys as part of the loan, but VA notes that not all lenders offer construction loans. You choose the builder. Since March 2025, VA no longer requires a VA builder ID, but the builder must still meet state and local licensing requirements. According to the Buyer's Guide, the veteran makes no loan payments until building is done, and the builder pays interest during construction. Unless the veteran is exempt, the VA funding fee is due at closing, before building starts; the lender sends it to VA within 15 days. It's the only fee that can be rolled into the loan. VA News reported that VA guarantees the loan only after a clear final compliance inspection, and that most builds can take a year or more.

USDA. The training presentation describes a 30-year fixed-rate single-close loan. It can hold a reserve of up to 10% of building costs for overruns or change orders, and up to 12 months of payments during construction. It can cover the land, well and septic installation, driveways, landscaping, permits and survey fees. The builder needs at least two years of single-family building experience and at least $500,000 in general liability insurance, and you can't build the home yourself. USDA has property and income eligibility rules, so ask a lender whether your lot and household qualify.

What will the lender ask us for first?

VA says construction loans come "with stricter qualifications and greater documentation." Expect to show proof of income, reserves, assets and debts, and to go through a full credit check. Under Fannie Mae's rules, credit papers and the appraisal can be no more than four months old at closing. When the house is finished, an appraiser certifies the work is complete; if the value has dropped, the lender orders a new appraisal and qualifies you again.

For land you already own, FHA lenders want the closing document showing what you paid and when, plus an itemized list of options you're paying for and where that money came from. USDA accepts a building permit as proof of plans. Your plans, builder contract and land paperwork are a good place to start.

Is there a North Carolina rule to know before signing with a builder?

Yes. Under state law, G.S. 44A-11.1, when a project costs $40,000 or more, the owner must name a lien agent no later than first contracting with anyone to do the work. The lien agent must come from the list of registered lien agents kept by the NC Department of Insurance. (A lien is a legal claim against property, such as one from an unpaid contractor.) The rule doesn't apply to improvements to an existing owner-occupied single-family home. A real estate attorney can walk you through it.