Lending
What is a construction loan, exactly?
How draws, reserves and single-close loans work when you build a home.
Paid in stages
A construction loan is short-term financing for building a home: land, site prep, materials and labor. Instead of one lump sum, the money is released in stages, called draws, as each phase of work is completed.
Two-close loans
You take a short-term construction loan now, then close again later to refinance into a permanent mortgage once the home is finished. That means two closings and two sets of closing costs.
Single-close loans
One closing up front. The construction loan automatically converts into your permanent mortgage when the home is done, with no second closing and no second round of fees. USDA, FHA and VA construction programs use this structure.
During the build
The lender usually holds a contingency reserve for unexpected costs and pays the builder as inspections confirm each stage is complete. After final inspection, the loan converts to the permanent mortgage (single-close) or is refinanced into one (two-close).