What Is a Construction Loan?
A construction loan funds the build of a new home rather than the purchase of an existing one. The bank releases money in stages tied to completed milestones (foundation, framing, drywall, finish), and you pay interest only on the drawn balance during the build. At completion, either the same loan converts to your permanent mortgage (one-time close) or you close a separate permanent loan (two-time close).
Builders working at scale should read multi lot construction financing and commercial builder financing. For a single project, land acquisition and construction loans and spec home construction loans cover the two common shapes.
Construction loans are different animals from regular mortgages. Rates are usually slightly higher, documentation is heavier (builder contract, plans, draw schedule, appraisal based on future value), and timelines are driven by the build pace. The right loan structure depends on whether you are buying a production-builder home, building custom on owned land, or tearing down and rebuilding.
Banks That Offer Construction Loans in Houston
Houston construction financing comes from several lender types, but not every institution offers every structure. Start by separating an owner-occupied custom build from a builder's speculative project. The borrower, repayment source, and project documentation differ, and program availability depends on the lender.
Texas community banks
Texas community banks often suit borrowers who want a portfolio construction loan and a local lending relationship. They typically review personal financials, liquidity, lot ownership, builder experience, plans, and a detailed budget. Some also finance small builders. Guarantees, deposit relationships, geographic limits, and permanent financing options depend on the lender.
Credit unions
Credit unions can be an option for eligible members building a primary residence. They typically require membership, documented income and assets, acceptable credit, an approved builder, and an appraisal based on the proposed completed home. Not every credit union offers construction lending, and some limit eligible locations, property types, or loan structures.
National banks with one time close programs
National banks that offer one time close construction loans may suit borrowers seeking construction and permanent financing through one initial closing. They typically require residential mortgage qualification, builder approval, completed plans, a construction contract, and project underwriting. Conversion conditions, lock arrangements, extensions, and any updated documentation depend on the program. Conversion is not unconditional.
Private construction lenders for builders
Private construction lenders often serve builders developing spec homes or projects that fall outside consumer mortgage programs. They typically emphasize project feasibility, borrower equity, construction experience, collateral, and an exit through sales or refinancing. Draw controls, guarantees, interest reserves, and minimum project sizes depend on the lender. These are generally business-purpose loans, not substitutes for an owner-occupied mortgage.
Builder in house financing
Builder in house financing often means an affiliated or preferred mortgage provider financing the buyer's purchase of a completed production home. It does not necessarily fund a custom build on the buyer's lot. Buyers typically need mortgage qualification and a purchase contract. Compare any financing-linked incentives with outside offers, including fees, eligibility conditions, and the permanent payment.
When does a broker compare these options?
A broker typically compares accessible construction programs once the borrower has a project outline, budget, land details, and intended repayment plan. Early screening can identify eligibility gaps before final plans are ordered. Formal comparisons become more useful after the builder, contract, and specifications are available. A broker does not have access to every lender, and each lender controls approval.
Construction Loan Broker vs a Bank Branch
A construction loan broker helps a borrower compare programs from construction lenders the broker can access. A bank branch typically offers its institution's own programs, sometimes through a specialized construction lending team. Neither route is automatically preferable. The useful question is whether the available program fits your borrower profile, builder, property, and repayment plan.
What a construction loan broker typically does
The broker starts by separating consumer custom-home financing from business-purpose builder financing. For a homeowner, the review typically includes income, assets, credit, land equity, and the projected permanent payment. For a builder, it often includes experience, project costs, available equity, and the sales or refinance exit.
The broker then assembles a lender-ready package and compares available proposals. Important differences include:
- How the lender values owned land and applies equity.
- Builder approval and construction contract requirements.
- Draw inspections, fees, retainage, and reimbursement procedures.
- Contingency funds, extension provisions, and cost-overrun responsibilities.
- Permanent financing conditions or the required repayment exit.
What a bank branch can provide
A branch or specialist lending team can explain its own underwriting and draw procedures directly. An existing banking relationship may help establish familiarity with your finances, although it does not replace approval requirements. Some banks do not accept broker submissions, so a direct application may provide an additional option.
What to ask before choosing
Ask which construction lenders are being considered, whether the broker can submit to them, and how compensation is disclosed. Request written terms and identify assumptions that remain subject to underwriting.
A broker coordinates comparison and communication but does not approve the builder, issue the appraisal, authorize draws, or promise loan approval. Those responsibilities typically remain with the lender and its appointed service providers.
Builder Spec Home Financing in Houston
Builder spec home financing funds homes constructed for sale before an end buyer has committed to purchase. It is typically business-purpose credit secured by the project. For small Houston builders, the central questions are how much equity must go in, how construction funds are released, and how each completed home pays down the debt.
InSync has brokered multi lot ground up packages for local builders. Each new project still requires its own review of the builder, collateral, budget, and repayment plan.
Multi lot packages and project underwriting
A multi lot package may finance several homes under one facility, with separate budgets and collateral allocations. Construction lenders typically review lot control, plans, permits or permitting status, comparable sales, contractor arrangements, builder experience, and liquidity. They may limit simultaneous starts or require additional equity as the project progresses.
Draws and interest reserve
Funds are typically advanced through draws tied to verified progress and eligible costs. Inspection requirements, lien documentation, retainage, and reimbursement timing depend on the lender. Builders should understand whether they must pay subcontractors before receiving reimbursement and maintain working capital accordingly.
An interest reserve may be included to cover eligible interest during construction and marketing. It is not additional profit or unlimited protection against delays. The reserve amount, funding method, and responsibility for shortfalls depend on the loan documents.
Release prices and end buyer takeout
For a loan secured by multiple lots, release prices specify the payment required to release an individual home from the lender's lien when it sells. That payment may exceed the debt initially allocated to that lot.
End buyer mortgages often provide the sale proceeds that repay the construction facility. Each buyer must qualify independently. Builders should test slower sales, appraisal shortfalls, price reductions, and extension costs before relying on that takeout.
One-Time Close vs Two-Time Close Construction Loans
The biggest decision on structure is whether to close once or twice.
One-Time Close (Construction-to-Permanent)
You close one loan at the start. It covers the build period and then automatically converts to your permanent mortgage at completion. You lock your rate up front, pay closing costs once, and do not re-qualify after the build.
- Pros: One set of closing costs, one underwriting, locked rate protects you if rates rise during the build, no risk of re-qualification problems if your income or credit changes.
- Cons: Slightly higher permanent rate than a two-time close (typically 0.125 to 0.375 percent premium for the rate-lock protection).
- Best for: Most Houston buyers, especially those building in a rising-rate environment or with income that could fluctuate during the build.
Two-Time Close
A short-term construction loan during the build, then a brand-new permanent mortgage at completion. Two separate closings.
- Pros: Potentially lower permanent rate, flexibility to shop the permanent loan at completion.
- Cons: Double closing costs (typically $8K to $15K in extra fees), re-qualification required, rate risk during the build.
- Best for: Borrowers expecting rates to drop significantly during the build, or those with income situations that will look cleaner at completion.
Construction to Permanent: One Loan or Two
Construction to permanent financing connects the building phase with the mortgage used after completion. A one time close typically establishes both phases at the initial closing. Conversion still depends on the program's completion requirements, which may include inspections, title updates, occupancy documentation, and confirmation that specified conditions remain satisfied.
A two time close uses a construction loan followed by a separate permanent mortgage. The borrower typically applies and qualifies for the permanent loan, with another closing and associated costs. This can offer flexibility to compare permanent financing, but it also creates exposure to changes in credit, income, property value, and available terms.
Ask whether the proposed thirty-year term describes the permanent mortgage amortization, when payments change, and what happens if construction runs late. Compare extension provisions, conversion conditions, additional documentation, and total fees. Neither structure removes construction risk; suitability depends on the lender, project, and borrower's finances throughout the building process.
Construction Loan Requirements in Houston
Down Payment
Most Houston construction loans require 20 to 25 percent down on the total project cost (lot plus build). Land you already own counts toward the down payment. If your lot is paid off and worth 25 percent of the project, your cash requirement can drop to near zero. VA construction loans allow 0 percent down for qualified veterans, and some FHA construction-to-perm programs allow 3.5 percent down with the right lender.
Credit Score
680 minimum for most programs, with the best rates at 720+. Portfolio programs accept scores to 640 with larger down payments. Unlike purchase loans, construction loans weigh credit heavier because the bank is underwriting a future-value asset that does not exist yet.
Income and Debt-to-Income
DTI gets calculated based on the projected permanent payment, not the construction-period interest-only payment. This trips up buyers who assume the lower interest-only number is what qualifies them. Plan around the full PITI payment from day one.
Builder and Project Documentation
The bank will require a signed builder contract, detailed plans and specs, a draw schedule, and an appraisal based on projected future value. Builder has to be approved by the bank (most banks keep an approved-builder list; an unknown builder can often get added with financial and project history documentation).
How the Draw Schedule Works
During the build, the bank releases funds in stages called draws. A typical Houston construction loan has 4 to 6 draws over 6 to 12 months, tied to milestones:
- Draw 1: Site prep, foundation, slab (roughly 10 to 15 percent of loan)
- Draw 2: Framing, roof, exterior sheathing (roughly 25 percent)
- Draw 3: Mechanical rough-in (plumbing, electrical, HVAC) (roughly 15 to 20 percent)
- Draw 4: Drywall, interior finish rough (roughly 15 to 20 percent)
- Draw 5: Trim, cabinets, fixtures (roughly 15 percent)
- Final draw: Punch list, final inspection, certificate of occupancy (roughly 10 to 15 percent)
Before each draw, the bank sends an inspector to verify the work is actually done. You pay interest only on the drawn balance, not the full loan amount, so your carrying cost ramps up as the build progresses.
Builder In-House Financing vs Independent Broker
Building spec homes, custom homes, or a multi-lot project as a builder or developer? See our construction loans for Houston builders and developers, where we package the deal and shop it across multiple construction capital sources.
Production builders (Toll, Lennar, Perry, D.R. Horton, Chesmar, Meritage, and the rest of the 17 majors in Houston) almost always have a preferred in-house lender and push you to use them with rate buydowns and closing-cost incentives tied to the financing package. Buyers see the flyer payment and think they are getting the best deal.
They are usually not. The "free" rate is priced into the home and the preferred lender's margin is wider than what an independent broker can get you. On a $500K Houston new build, we routinely show outside-lender payments that beat the preferred-lender payment by month 25 to 30, even when the preferred lender starts with a subsidized rate. The builder keeps pushing the incentive because it is worth less than what they charge for it.
Custom builds are even more lopsided. The builder has no in-house financing to offer, so the only question is which outside bank fits your file best. That is exactly what an independent broker is for. Read our full new construction buyer guide for the flyer-vs-reality payment math.
Construction Loans for VA, FHA, and Special Programs
VA Construction Loans
Qualified veterans can build with 0 percent down using a VA one-time close construction loan. Not every lender offers VA construction, so the list is shorter. Same VA funding fee and entitlement rules apply as a VA purchase loan.
FHA Construction-to-Permanent
FHA runs a 3.5 percent down construction-to-permanent program, but very few Houston lenders actively offer it because the overlays are strict and the draw inspection requirements are heavier. Available through the right broker channels.
Jumbo Construction Loans
Build budgets above the 2026 Harris County conforming limit ($832,750) require a jumbo construction loan. See our jumbo loans page for details on the permanent financing piece. Jumbo construction typically wants 25 to 30 percent down and 720+ credit.
Houston-Specific Considerations
- MUD tax rate: Many Houston build locations sit inside Municipal Utility Districts. MUD taxes can swing your monthly payment by $400 to $800. Factor this into your DTI ratio before locking in a loan amount. Use the mortgage calculator for a real picture.
- Flood zone: Anything in FEMA zones AE, A, or VE needs flood insurance. The bank will require it and the premium affects your DTI.
- Foundation and soil: Houston's expansive clay makes foundation spec critical. Banks often require a soils report before funding.
- Hurricane and wind: Coastal builds (Galveston County, parts of Brazoria) need windstorm coverage, which is a separate policy from flood and homeowners.
- Harris County appraisals: Future-value construction appraisals in Houston have tightened post-2022. Build up a contingency reserve in your budget for appraisal gaps.
The Construction Loan Process in Houston
- Pre-qualification: We review your credit, income, assets, and project concept. This tells you the loan size you can carry. Start with our free mortgage analyzer.
- Builder selection and contract: If you do not yet have a builder, we can point you to approved builders for your market. Builder must be acceptable to the bank.
- Plans, specs, and budget: Finalized plans, materials specs, and itemized budget from the builder.
- Loan application and appraisal: Full application, future-value appraisal, and bank underwriting. Typically 30 to 45 days.
- Closing: Sign the construction loan. Lot purchase (if applicable) funds. Build begins.
- Draws during the build: 4 to 6 inspections and fund releases over 6 to 12 months.
- Conversion to permanent: If one-time close, the loan automatically converts at the final draw. If two-time close, you close a new permanent loan.
For the current rate environment and rate-buydown math, run your file through the mortgage analyzer. To see live Houston new-construction inventory with incentive packages, browse new construction homes.
Get a Construction Loan Quote for Your Houston Build
We shop the field for you. Multiple Texas banks, credit unions, and portfolio lenders, compared side by side with the real total cost over your expected build and ownership period. Whether you are building custom on owned land, putting a contract on a Toll Brothers QMI in Sienna, or looking at a tear-down-and-rebuild in Bellaire or West U, we run the numbers and tell you straight which path saves the most.
Ben Helstein | NMLS# 1577314 | InSync Homes & Loans | Equal Housing Opportunity
Frequently Asked Questions
Which banks offer construction loans in Houston?
Several Texas-based and national banks offer construction loans in the Houston metro, including Frost Bank, Prosperity Bank, Texas Capital, First Horizon, BOK Financial, and portfolio lenders working through mortgage brokers. Local credit unions like TDECU and Amplify also run active construction programs. Rates, draw schedules, and qualification standards differ significantly between banks, which is why shopping through an independent broker almost always beats walking into one bank.
What is the difference between a one-time close and two-time close construction loan?
A one-time close construction loan (also called construction-to-permanent or CTP) closes once at the start. The same loan covers the build period and then converts to your permanent mortgage automatically. You lock your rate up front, pay closing costs once, and do not re-qualify. A two-time close is two separate loans: a short-term construction loan during the build, then a new permanent mortgage at completion. Two-time close can give you a slightly lower rate on the permanent piece but requires re-qualification and second-round closing costs. For most Houston buyers, one-time close is the cleaner path.
How much do I need to put down on a Houston construction loan?
Typical Houston construction loans require 20 to 25 percent down on the total project cost (lot plus build). Some VA construction loans allow 0 percent down for qualified veterans, and some FHA construction-to-perm programs allow 3.5 percent down with the right lender. Land you already own can count toward the down payment. If the land is paid off and worth 25 percent of the project, your cash requirement can drop to near zero.
Should I use the home builder's in-house financing or an outside construction loan broker?
Builder in-house financing is structured to sell more homes, not to give you the best rate. The advertised buydown looks cheap because it is baked into the sticker price and the lender's margin is fatter than what an outside broker can access. An independent construction loan broker shops multiple Texas banks, has no incentive to lock you into a particular product, and can often match or beat the builder rate without the incentive strings. For custom builds (not production-builder spec homes), an outside broker is almost always the better call because the builder has no skin in the financing.
How does the draw schedule work on a Houston construction loan?
During the build, the bank releases funds to the builder in stages (draws) tied to completed milestones: foundation, framing, mechanical rough-in, drywall, trim, and final. Typical Houston construction loans run 6 to 12 months with 4 to 6 draws. You pay interest only on the drawn balance, not the full loan, so your monthly carrying cost is lower at the start and ramps up as the build progresses. The bank sends an inspector before each draw to verify work completed.
What credit score do I need for a construction loan in Houston?
Most Houston construction loan programs want a 680 minimum credit score, with the best rates going to 720+. Portfolio programs and some VA construction lenders go down to 640 with larger down payments. Debt-to-income has to pencil based on the projected permanent payment, not the construction-period interest-only payment, which sometimes trips people up.
Can I get a construction loan to build on land I already own in Houston?
Yes. Owned land is treated as equity and counts toward your down payment requirement. If the land is paid off and worth 20 to 25 percent of the total project cost (lot plus build), you can often do a construction-to-permanent loan with no additional cash down. If there is still a lot loan outstanding, it gets rolled into the construction loan at closing.