Financing a custom home build is not like getting a mortgage for an existing house — and a lot of first-time builders don’t realize that until they’re already deep in the process. When you buy a finished home, a lender knows exactly what they’re lending against. When you build, the house doesn’t exist yet. That changes everything about how lenders think about the deal, and it changes the loan products available to you. Here’s a straightforward guide to how to finance a custom home build in Texas, so you can go into lender conversations informed.
Construction Loans vs. Conventional Mortgages: The Key Difference
A standard mortgage is a permanent loan secured by an existing property. A construction loan is a short-term loan that funds the building process — it’s specifically designed for a property that doesn’t yet exist as a finished product.
Construction loans work on a draw schedule rather than as a lump sum. The lender releases funds in stages — typically tied to construction milestones like foundation completion, framing, rough-in, drywall, and substantial completion. You draw what you need as work is completed, and you pay interest only on the drawn balance, not the full loan amount. This keeps your carrying costs lower during the build.
There are two main structures for construction financing:
Construction-Only Loans
A construction-only loan covers the build period (typically 12–18 months) and then comes due. At project completion, you pay it off — usually by refinancing into a permanent mortgage. This gives you flexibility to shop rates for your permanent loan after the build is done, which can be advantageous if rates improve. The downside: you’re going through two separate loan closings, which means two sets of closing costs and two rounds of qualification.
Construction-to-Permanent Loans (One-Time Close)
A construction-to-permanent loan — sometimes called a one-time close — converts automatically from a construction loan to a permanent mortgage when the Certificate of Occupancy is issued. You qualify once, close once, and the loan transitions without a second closing. You lock in your permanent rate at the beginning, which can be a significant advantage in a volatile rate environment. Most of our clients use this structure because of the simplicity and single-closing cost savings.
What Lenders Look For
Construction loans carry more risk for lenders than conventional mortgages — the collateral doesn’t fully exist yet, and construction projects can go over budget or over schedule. As a result, lenders apply stricter qualification standards:
- Credit score: Most construction lenders want a minimum of 680–700. Some programs allow lower scores with higher down payments, but 720+ will get you the best terms.
- Down payment: Expect 20–25% down for a custom construction loan. Some lenders will accept land equity as part or all of the down payment if you own the lot free and clear or have significant equity in it.
- Debt-to-income ratio: Standard qualification targets — most lenders want your total housing costs to be no more than 28–31% of gross monthly income and total debt service no more than 43–45%.
- Reserves: Many lenders require 6–12 months of mortgage payments in liquid reserves after closing. This protects against the unexpected.
- Builder approval: Lenders typically require that the builder be licensed, bonded, and approved by their institution. This is standard — your builder should be able to provide the documentation lenders need.
- Fixed-price contract: Most construction lenders want a cost-plus contract with a guaranteed maximum or a fixed-price contract. Open-ended cost estimates don’t give them enough certainty to underwrite the loan.
Understanding the Draw Schedule
The draw schedule is the backbone of a construction loan. Here’s how it typically works in practice:
Your lender funds your project in phases — usually 4–6 draws over the life of the construction. A common draw structure for a custom home might look like this:
- Draw 1 — Foundation: Released after foundation is poured and inspected (typically 10–15% of loan)
- Draw 2 — Framing: Released after framing and roof are complete (typically 20–25%)
- Draw 3 — Rough-In: Released after rough plumbing, electrical, and HVAC pass inspection (typically 15–20%)
- Draw 4 — Drywall/Finishes: Released when drywall is complete and interior finishes are underway (typically 20–25%)
- Draw 5 — Substantial Completion: Released when the home is substantially complete and final inspections are near (typically 15–20%)
- Final Draw/Retainage: Released at Certificate of Occupancy (typically 5–10%)
Before each draw, the lender sends an inspector to verify that completed work matches what’s being requested. Your builder submits a draw request with documentation, the inspector confirms the work, and funds are released. A good builder manages this process to keep the project moving without cash flow gaps.
Using Land Equity as a Down Payment
One of the most useful — and underutilized — tools in construction financing is land equity. If you already own your lot, that equity can often substitute for all or part of your required down payment. The lender appraises the land and counts your equity toward the down payment requirement. For example, if you own a $200,000 lot free and clear and your lender requires 20% down on a $1 million construction loan, your land equity satisfies that requirement — you may not need to bring additional cash to closing.
This is one reason we often advise clients to acquire land early — even if you’re not ready to build for a year or two. Land equity is a financing asset. Check out our post on choosing the right lot for guidance on evaluating land before you buy.
Other Financing Options Worth Knowing
VA Construction Loans
Veterans and active duty service members may qualify for VA construction loans, which can offer zero down payment options. VA construction loans are more complex to originate, and not all lenders offer them, but for qualified borrowers they’re worth pursuing. The VA requires the builder to be VA-registered.
USDA Rural Development Loans
Some Hill Country areas outside of denser development qualify for USDA Rural Development loans, which can include construction financing for primary residences. Income limits and property eligibility restrictions apply. If you’re building in a more rural area of Blanco or Gillespie County, it’s worth checking eligibility at usda.gov.
Portfolio Lenders and Local Banks
Don’t overlook local banks and credit unions. Institutions like Amplify Credit Union, First National Bank Texas, and community banks serving Hays County sometimes offer construction loan products with more flexibility than national lenders — particularly for unusual land situations or self-employed borrowers. A local mortgage broker who specializes in construction lending is worth consulting.
Getting Your Documentation Ready
Construction loan applications require more documentation than standard mortgage applications. Get ahead of this by preparing:
- Two years of tax returns (personal and business if self-employed)
- Two months of bank and asset statements
- Pay stubs or proof of income for the past 30–60 days
- Signed contract with your builder, including scope of work and fixed or maximum price
- Plans and specifications (at least preliminary; final permitted plans may be required at closing)
- Land deed or purchase contract (if the lot is not yet closed)
- Builder’s license, insurance certificates, and financial references
The more organized you are going in, the faster the process moves. The borrower who shows up with everything in order closes faster.
If you’re ready to start planning your build in Dripping Springs or the surrounding Hill Country, we’re happy to talk through what financing typically looks like for a project of your scope and connect you with lenders we’ve worked with before. Get a free build estimate to get the budget conversation started.
Frequently Asked Questions
What’s the interest rate on a construction loan compared to a regular mortgage?
Construction loan rates are typically 0.5–1.5% higher than conventional mortgage rates for the construction period, reflecting the additional risk the lender carries. On a one-time close construction-to-permanent loan, you’ll lock in a permanent rate at closing that’s tied to current market rates for that loan product. The construction period rate may float or be fixed depending on the lender and product. Over a 12–14 month build, the interest-only payments on the drawn balance are usually manageable — often $1,500–$4,000/month depending on how much has been drawn and the rate in effect.
Can I get a construction loan if I’m self-employed?
Yes, but it’s more complex. Self-employed borrowers typically need two years of tax returns showing consistent income, and lenders use your net income (after business deductions) rather than gross revenue. This means a self-employed borrower who writes off a lot of business expenses may qualify for less than they expect. Work with a lender experienced in construction lending for self-employed borrowers early in the process — before you’ve finalized your plans and budget.
What happens if my build goes over budget?
This is exactly what your contingency is for. We always recommend budgeting a 10–15% contingency on top of the base construction cost. If your project exceeds the original loan amount, you may need to bring additional cash or negotiate a loan modification. Lenders are generally not enthusiastic about extending construction amounts. The best protection is a realistic, thoroughly detailed budget and tight change order management from day one.
How long does it take to get a construction loan approved?
Plan for 45–60 days from application to closing for a construction loan, though some lenders can move faster and some take longer depending on complexity. Delays most often come from incomplete documentation, appraisal issues (appraising a home that doesn’t exist yet requires comparable sales and plan review), or title issues on the land. Start the application process early — ideally while your plans are being finalized, not after they’re complete.
Does my builder need to be approved by my lender?
Yes, in virtually all cases. Construction lenders require the builder to be licensed, insured, and approved through their vetting process. They want confirmation that the contractor has a track record of completing projects. At Ridge Rock, we carry full licensing and insurance and have established relationships with construction lenders in the Austin and Hill Country market.
What if I already own my land — can I refinance it as part of the construction loan?
Yes. If you own your lot free and clear, you can often fold that land value into the construction loan as your equity contribution. If you have an existing loan on the land, the construction lender typically pays it off at closing and rolls the balance into the new loan. Your land equity is a real financing asset that can reduce or eliminate your out-of-pocket down payment requirement.
Ready to Start Your Project?
Financing a custom build is more involved than a standard mortgage, but it’s absolutely manageable when you understand the process and start early. We work with clients from the earliest planning stages — including helping you think through budget, timeline, and lender conversations before you’re committed to anything.
Get a free build estimate or call us at (512) 294-9579. Let’s get a realistic number in front of you so your lender conversations can start from a solid foundation.