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Construction and commercial

A construction loan is for someone building a home on a lot, who can carry a project as well as a mortgage

A construction loan pays for building a home on a lot you own or are buying: the builder is paid in draws as each stage of the work is inspected, and when the home is finished the loan either converts into an ordinary mortgage or is paid off by one. In San Luis Obispo County the lot can bring its own questions, the well or water connection, the septic system, the fire zone, a coastal permit, and the building permit itself, and a lender wants those answered before it funds a build. This page says what the loan asks of you, what it costs over a mortgage on a finished home, and when it is not the right tool.

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The program in one box

What it is
A loan that pays for building a home on a lot you own or are buying. The builder is paid in stages as the work is inspected, and when the home is finished the loan either turns into an ordinary mortgage or is paid off by one.
One closing or two
A single-closing construction-to-permanent loan is one loan and one closing: it funds the build, then converts to the permanent mortgage at completion. A standalone construction loan is paid off by a separate mortgage when the home is done, which means a second closing and a second approval.
Who it suits
Someone with a lot, a licensed builder, a set of plans and a budget, who can carry a project as well as a mortgage, and whose income and credit would qualify for the finished home's mortgage today.
How it is qualified
On your income and credit, with full documentation, for the mortgage the finished home will carry, alongside the lender's review of the builder, the plans, the budget and the lot. The appraiser values the home from the plans as if it were already complete.
How the money goes out
In draws against inspections as each stage is finished, with interest charged on what has been drawn rather than on the whole loan.
The lot and the permits
A building permit, and for a rural lot the water, the septic system, the fire zone and its access rules, and a coastal permit where the lot is in the coastal zone, all come into the file. A lot with no path to a permit is not ready for a construction loan.
What it costs
More than a mortgage on a finished home: interest during the build, possibly while you still pay for where you live now, inspection and draw fees, and on a two-close loan a second set of closing costs. A privately funded construction loan can add points and a prepayment penalty.
Where it is not the answer
A buyer who wants a finished home and no project risk, which is a conventional, FHA or VA loan on a house that exists. A house that needs work is a renovation loan, not a construction loan. A second unit on the lot you live on starts on our ADU page, where a construction loan is one of four routes.

What this program is good at

  • It is the way to finance a home that does not exist yet, which on a county lot with a view and no house is the whole question.
  • A construction-to-permanent loan qualifies you for the permanent mortgage at the start, so you are not starting a new application when the build ends, though a long build can mean updated paperwork and requalifying at conversion.
  • A lot you already own can go into the loan: Fannie Mae's Selling Guide and FHA's handbook both let a construction-to-permanent loan pay off what is owed on land the borrower owns and fund the build.
  • FHA and VA both have construction-to-permanent options, and we arrange them.

Who qualifies

What a lender weighs before this program is on the table. A lender can add rules of its own, and those rules can differ from one lender to the next.

Your income and credit, for the finished home's mortgage

A construction loan on a home you will live in is qualified the way a mortgage is: pay stubs, tax returns, bank statements, a credit pull, and the debts you already carry measured against the payment the finished home will have. Federal rules require the lender to verify your ability to repay the permanent loan.

The builder, the plans and the budget

The lender reviews the builder as well as you, including the builder's license and a signed contract with a price. The plans and specifications are what the appraiser values, so they have to be complete enough to value. The budget has to cover the whole build, and a lender can ask for a contingency in it, because the loan funds what was approved and an overrun is yours to find. Someone acting as their own general contractor can meet resistance: FHA, for one, accepts a borrower as the general contractor only if the borrower is a licensed general contractor.

The lot

The lot is part of the collateral and can be the hard part of the file. If you own it, the equity in it can count toward what you bring; if you are buying it, the purchase can go into the same loan. Either way the lender wants to see a path to a permit: a building permit from the city, or from the county's Planning and Building Department outside the cities, and for a rural lot the well or water connection, the septic system under the county's onsite wastewater rules, the fire hazard severity zone, the state fire-safe access rules where they apply, and a coastal development permit if the lot sits in the coastal zone.

A home you will live in, or a house built to sell

This page is about a home you will live in, or a second home, which is consumer lending with the protections that come with it, including the ability-to-repay rule on the permanent loan. A house built to be sold is a business-purpose loan under a different set of rules, closer to a fix-and-flip loan.

Where it is not the answer

If what you want is a finished home and no project, a conventional, FHA or VA loan on a house that already exists is a simpler file that costs less. If the house exists and needs work, that is a renovation loan, FHA's 203(k) or a conventional renovation loan, not a construction loan. If the project is a second unit on a lot you already live on, start on our ADU page: a construction loan is one of the four routes there, and that page says when it is the right one. And if the lot has no path to a permit yet, there is no construction loan for it until it does.

How it works with us

What happens once you get in touch

The steps in order, so you can see what is coming. Nothing here is underwritten until a lender underwrites it.

  1. Tell us about the lot and the plan

    Where the lot is, whether you own it, how far along the plans and the permit are, who the builder is and what the budget looks like. No credit pull to have that conversation.

  2. We start with the finished home's mortgage

    With your permission we pull credit, look at your income and work out what payment the finished home can carry. That is what sets the budget you can build to, before the plans get expensive.

  3. Choosing the shape of the loan

    One closing or two, conventional or government one-time-close, bank or private: a lender may write some of these shapes and not others, so the shape is a placement decision as much as a preference. We arrange each of these shapes, the FHA and VA one-time-close loans included. Once the shape is chosen, your loan officer can write a pre-qualification if the file supports one.

  4. Builder review, appraisal, approval and the draws

    The lender reviews the builder and the budget, the appraiser values the home from the plans as if it were complete, and underwriting signs off on the whole package before closing.

What people ask about this program

If yours is not here, call us. The useful answer depends on your file.

How does a construction loan work in San Luis Obispo County?

A construction loan pays for building a home on a lot you own or are buying. The lender approves you, the builder, the plans and the budget, the appraiser values the home from the plans as if it were already finished, and the money goes out in draws as each stage of the work passes inspection, with interest charged on what has been drawn. When the home is complete the loan either converts into the permanent mortgage, if it was a construction-to-permanent loan, or is paid off by a separate mortgage at a second closing. In San Luis Obispo County the lot brings its own questions, including water, septic, fire-zone access and the building permit, and a lender wants those answered before it funds a build.

What is the difference between a one-close and a two-close construction loan?

A one-close, or single-closing construction-to-permanent, loan is a single loan with a single closing that funds the construction and then converts to the permanent mortgage when the home is finished, so you qualify at the start; depending on the program, the rate can float during the build or the terms can be modified at conversion, and a lender can require updated paperwork and requalify you if the build runs long. A two-close loan is a standalone construction loan that is paid off by a separate mortgage at completion, which means a second application, a second approval and a second set of closing costs, and whatever has changed in your income, your credit or the market in the meantime comes into that second approval. Which one you can get depends on the lender; which one you want depends on how much certainty you need at the start.

Can I get a construction loan if I plan to build the house myself?

It is harder. FHA's construction-to-permanent program, for one, accepts a borrower as the general contractor only if the borrower is a licensed general contractor, and a lender can decline an owner-builder outright. We arrange owner-builder loans with lenders whose rules allow them, so if you are set on building it yourself, say so in the first conversation.

Does FHA or VA offer a construction loan?

Yes, in the construction-to-permanent form. FHA has a construction-to-permanent option within its single-family program, VA has a construction and permanent home loan for eligible veterans, and USDA has a combination construction and permanent loan in the rural areas it serves. Each can close once before the build and convert to that program's ordinary mortgage when the home is finished, and each carries the program's own rules about the borrower, the builder and the property. Not every lender that writes FHA or VA loans writes the construction version, so whether one is open to you is a placement question before it is an eligibility question.

What does a construction loan cost compared with a mortgage on a finished home?

More, in several ways at once. You pay interest on the money that has been drawn during the build, possibly while still paying for wherever you live now, along with inspection and draw fees, and a lender prices the risk of a project that is not built yet into the loan. A two-close loan adds a second set of closing costs. A construction loan from a private lender can add points and a prepayment penalty. None of it is a figure to take from a web page.

Construction and commercial

Land and lot loan

Buys raw land or a building lot, with a loan from a lender such as a bank, credit union or private lender, on its own terms. It can cost more.

  • It buys the parcel now, before there is a house for a home loan to lend on, so you can own the lot while the plans, the permits and the money for building come together.
  • A lot bought first can go into a construction loan later: Fannie Mae's Selling Guide and FHA's handbook both let a construction-to-permanent loan pay off what is owed on land the borrower owns and fund the build.
  • The CFPB lists loans secured by vacant land among those that get a Loan Estimate and a Closing Disclosure. On a loan for a personal purpose from a lender federal law counts as a creditor, the terms and costs reach you in writing before closing.
More about Land and lot

Construction and commercial

ADU financing

There is no single ADU loan. Four routes to pay for a second dwelling on your lot, and how to pick between them.

  • California law requires your city or county to approve an ADU that meets the state's standards without a discretionary hearing.
  • Four kinds of loan can pay for a build, and the right one depends on your equity, the cost of the work and whether you want a new first mortgage or a second lien.
  • A renovation loan lends against what the home will be worth with the ADU finished, not only the equity you have today, which can put a build within reach for an owner who bought recently.
More about ADU

Not government-insured

Conventional loan

A loan for solid credit and income, with private mortgage insurance that does not have to be permanent.

  • Private mortgage insurance does not have to be permanent. On a one-unit home you live in, the Homeowners Protection Act of 1998, subject to its conditions and exceptions, gives you the right to ask for borrower-paid mortgage insurance to come off once the loan is paid down far enough against the home's original value, and requires it to end automatically at a later point on the loan's amortization schedule.
  • It works for a primary residence or an investment property of one to four units, and for a one-unit second home. FHA and VA are built for a home you live in; FHA allows a second home only in narrow hardship cases.
  • There is no federal credit floor on a conventional loan, and Fannie Mae's Desktop Underwriter sets no minimum score of its own: it weighs the credit with its own risk factors and returns what the file needs.
More about Conventional

Where this program fits:Buying a homeRefinancingThe county's loan limitsThe Central CoastServices

Where it comes up in the county:San Luis ObispoAtascaderoTempletonMorro BayLos OsosCambriaPismo BeachNipomoLompoc

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California Mortgage Solutions Inc. · Company NMLS #325189

This page is general information about a loan program, not an offer of credit or a commitment to lend. What a lender will do with your file depends on the file.

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