What Is a Residential Construction Loan?
A construction loan is short term financing used to build a new home from the ground up. Unlike a traditional mortgage where the full loan amount is disbursed at closing, construction loans release funds in stages (called draws) as the builder completes milestones like foundation, framing, roofing, and finishes. During the construction phase, the borrower typically makes interest only payments on the amount that has been drawn.
Once the home is complete, the loan either converts to a permanent mortgage or the borrower takes out a separate mortgage to pay off the construction loan.
This type of financing applies to custom builds on your own lot, spec homes, or even teardown and rebuild projects in established Houston neighborhoods.
One-Time Close vs Two-Time Close
One-Time Close (Construction to Permanent)
You close once. The construction loan automatically converts to a permanent mortgage when building is complete. One appraisal, one set of closing costs, one rate lock. Your permanent rate is locked before construction even starts, which protects you if rates rise during the build.
The downside is slightly less flexibility. If you want to shop for a better rate after construction, you are already locked in.
Best for borrowers who want certainty, simplicity, and protection against rate increases.
Two-Time Close
You close twice. First on the construction loan, then on a separate permanent mortgage once the home is finished. This gives you the flexibility to shop for the best permanent rate after construction is done.
But it also means two sets of closing costs, two appraisals, and the risk that rates could be higher when you close on the permanent loan.
Best for borrowers who believe rates will drop during the build period or who want maximum flexibility on their permanent financing.
Which should you choose? For most Houston buyers building in 2026, we recommend the one-time close. It eliminates rate risk, saves on closing costs, and simplifies the entire process. But every situation is different. We will run the numbers on both options and show you which one saves you more.
How to Qualify for a Construction Loan in Houston
Credit Score
Most construction lenders require a 680 minimum, with 700+ preferred for the best rates. This is higher than FHA or conventional purchase loans because construction loans carry more risk for the lender. We work with lenders across the credit spectrum and can help you find options if your score falls in the 660 to 680 range.
Down Payment
Expect 10% to 20% down depending on the lender and your credit profile. Some programs allow as little as 10% for well qualified borrowers. VA construction loans are available with 0% down for eligible veterans, though fewer lenders offer them. Land equity can sometimes count toward your down payment if you already own the lot.
Income and Debt to Income Ratio
Standard documentation: two years of W2s and tax returns, or 12 to 24 months of bank statements for self employed borrowers. Most lenders cap DTI at 43% to 45%. Your qualification is based on the projected permanent mortgage payment, not the interest only construction payment.
Builder Approval
This is the part most borrowers do not expect. The lender does not just approve you. They also approve your builder. The builder must be licensed, insured, and experienced. Most lenders require a minimum track record (often 2 to 3 completed homes) and will review the builder's financial statements.
If you are using a production builder in a master planned community, this is usually straightforward. If you are hiring a custom builder, plan for extra documentation and lead time.
Plans, Specs, and Budget
You will need a complete set of architectural plans, a detailed construction budget (line item by line item), and a signed construction contract. The lender uses these to determine the appraised value of the finished home (called an "as completed" appraisal) and to set up the draw schedule.
Why Work with a Houston Mortgage Broker
Construction loans are specialized. Most big banks offer them, but their programs are rigid and their rates reflect the cost of maintaining a large branch network. A mortgage broker like InSync shops your construction loan across a network of wholesale lenders who specialize in this product. That means more competitive rates, more flexible underwriting, and access to programs that banks do not advertise to walk in customers.
Construction lending also requires coordination between the borrower, the builder, the appraiser, and the lender. Draws need to be inspected and approved on schedule or your builder's timeline slips. At InSync, Ben Helstein manages this coordination directly. He understands the Houston building market, knows which lenders process draws quickly, and can troubleshoot issues before they delay your project.
And because InSync handles both real estate and mortgage, we can help you evaluate lots, review builder contracts, and structure the financing all under one roof. If you are buying land separately or building in a flood zone, that context matters for your loan structure. A bank loan officer who has never walked a Houston subdivision cannot give you that.
The InSync advantage: Ben is both a licensed real estate agent and a licensed mortgage loan originator. He can help you evaluate whether a lot makes financial sense before you commit to building on it. Location, flood zone, MUD taxes, and resale potential all factor into whether a construction project pencils out.
Frequently Asked Questions
Do you have to put 20% down on a construction loan?
Not always. While 20% is common, some lenders offer construction loans with as little as 10% down for borrowers with strong credit and reserves. VA construction loans are available with 0% down for eligible veterans, though the lender pool is smaller. If you already own the land, your lot equity can often count toward the down payment, reducing or eliminating the cash you need to bring to closing.
How hard is it to get a construction loan in Texas?
Construction loans have stricter requirements than standard purchase mortgages. You will need a higher credit score (typically 680+), a larger down payment, and an approved builder with a track record. The documentation is also heavier because the lender needs detailed plans, a line item budget, and a signed construction contract. That said, if you have solid credit, stable income, and a qualified builder, the process is very manageable. Working with a broker who specializes in construction lending makes it significantly smoother.
Which bank is best for a construction loan?
The best construction loan rarely comes from a single bank. Banks offer their own in house products with fixed terms and limited flexibility. A mortgage broker shops your loan across multiple wholesale lenders who specialize in construction financing. That competition typically results in better rates, lower fees, and more flexible underwriting than any one bank can offer on its own.
What is a good interest rate for a construction loan?
Construction loan rates are typically 0.5% to 1% higher than standard mortgage rates because of the additional risk the lender takes during the build phase. As of early 2026, competitive construction loan rates for well qualified borrowers fall in the mid to high 6% range, though rates change daily. Your actual rate depends on your credit score, down payment, loan amount, and the lender. The best way to find your rate is to get quotes from multiple lenders, which is exactly what a broker does for you.