How a Single-Close Construction Loan Works
A single-close construction loan establishes the construction financing and permanent mortgage in one closing. This page explains the loan mechanics: closing, draw administration, the interest-only construction phase, conversion, and timing.
The Four Phases of a Construction Loan
Close Once
- Construction financing and the permanent mortgage are established in one transaction
- Loan terms and the permanent-loan structure are set before construction begins
- The lender completes its underwriting, appraisal, and builder review before closing
Fund the Draw Schedule
- The builder requests funds as defined work is completed
- The lender inspects the work before each draw is released
- Draws are tied to the approved budget and construction agreement
Interest-Only Construction Phase
- Payments are typically interest-only on the outstanding construction balance
- The balance changes as approved draws are released
- The construction period and draw timing follow the loan documents and project timeline
Convert to the Permanent Loan
- Construction is completed and the required occupancy documentation is issued
- The loan converts to the permanent mortgage without a second closing
- Regular principal-and-interest payments begin under the established permanent-loan terms
What the Loan Needs to Administer the Build
Builder Review
The lender reviews the builder and the agreement before closing so it can administer the approved draw schedule during construction.
Approved Plans and Specs
The plans, specifications, and contract support the completed-value appraisal and define the scope used for construction administration.
Draw Schedule
The construction agreement and project budget identify how work will be staged, inspected, and funded after closing.
Construction Budget
The approved budget determines the construction-loan balance and the funds available for each planned phase of work.
Appraisal and Permanent Terms
The as-completed appraisal and approved permanent-loan structure are established before the single close.
Conversion Readiness
The completion process, occupancy documentation, and permanent payment start are outlined before construction begins.
Construction Loan Questions
What is the difference between a single-close and a two-close construction loan?
A single-close loan closes once — combining construction financing and the permanent mortgage into one transaction. A two-close loan requires a separate closing for the construction phase and another when the home is complete. Single-close avoids the second closing costs and rate risk.
Can I use land I already own as part of the down payment?
Yes. In many cases, equity in land you already own can satisfy some or all of the required equity contribution, reducing the cash needed at closing.
What happens if construction goes over budget?
Cost overruns beyond the contingency reserve typically require additional cash from the borrower. The loan amount is fixed at closing — the lender will not increase it mid-construction. This is why accurate budgeting and a solid contingency reserve are critical.
Can I act as my own general contractor?
Owner-builder loans are available but significantly more limited. Most lenders require a licensed GC. If you have a contractor's license, some programs may allow owner-builder arrangements with additional documentation.
How is the appraisal done before the home is built?
The appraiser reviews the plans, specifications, and comparable sales to estimate the completed value. This 'as-completed' appraisal is what the loan is based on — not the current land value.
What happens if the construction appraisal comes in low?
When the completed-value appraisal supports less than the total project cost, the construction loan must be structured around the lower appraised value and the program guidelines. Depending on the plan, that can mean more cash, a reduced scope or budget, or changes before closing. Reviewing the appraisal early helps preserve choices.
Video answer: what happens when a construction appraisal comes in low?
How do construction draws work?
Construction funds are released in stages as the approved work is completed. The builder requests a draw, the completed work is inspected, and the lender releases funds according to the approved draw schedule and construction agreement.
Video answer: how do construction draws work?
Continue Your Construction Planning
Construction Planning
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Construction Draw Process
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Understand payment reserves, contingency planning, and the cash picture after closing.
Fixed-Price vs. Cost-Plus
Compare contract structures before the builder agreement is finalized.
If the Appraisal Comes In Low
Know the decisions to review when completed value does not support the initial project plan.
Ready to Plan Your Build?
For the project decisions that come before a loan closes — land, builder, plans, contract, and budget — begin with the Construction Planning guide.
Start a Planning Review