Choosing between a jumbo mortgage and a conventional conforming mortgage can be confusing when the…
Construction Loans: Finance an Austin Custom Home
Building a custom home in the Austin area is exciting, but coordinating the land, builder, budget, and financing can feel overwhelming.
A construction loan is short-term financing that funds a custom home build through staged disbursements, commonly called draws, as construction progresses.
In this guide, we explain how construction loans work, what lenders typically review, and how to prepare for a custom build in Central Texas.
Key Takeaways
- Purpose: Construction loans can finance eligible land costs, building expenses, labor, materials, permits, and other approved project costs.
- Requirements: Lenders typically review the borrower, builder, plans, budget, appraisal, construction schedule, and contingency reserves.
- Funding: Money is generally released through draws after inspections confirm that specific construction stages are complete.
- Timeline: Loan preparation may take several weeks, while the construction period varies based on the project, builder, permitting, weather, and material availability.
- Best For: These loans are designed for borrowers building a primary residence, second home, or other eligible custom property rather than purchasing a completed home.
At Mission Mortgage of Texas, Inc. (NMLS# 207583), we help borrowers evaluate construction financing based on their property plans, income documentation, available funds, and long-term mortgage goals.
Quick Answers About Austin Construction Loans
- How are construction funds released? The lender typically releases money in draws tied to completed stages such as the foundation, framing, mechanical systems, and finishing work.
- Do I need to own the lot first? Not always. Some transactions can finance the lot and construction together, while others use land the borrower already owns.
- Do I make payments during construction? Borrowers commonly make interest-only payments based on the amount disbursed, although terms vary by program and lender.
- What is the difference between one-close and two-close financing? A one-close loan combines construction and permanent financing, while a two-close structure uses separate construction and permanent mortgage transactions.
How Does a Construction Loan Work?
A traditional mortgage funds the purchase of an existing property in one transaction. A construction loan works differently because the home does not yet exist in its completed form.
The lender evaluates the proposed project and orders an appraisal based on the plans, specifications, site, comparable properties, and estimated completed value. If the loan closes, funds are placed under a controlled draw process rather than given to the borrower or builder all at once.
A draw is a scheduled release of construction funds after an inspection verifies that an approved phase of work has been completed. The exact draw schedule is established before closing and should align with the construction contract and project budget.
A typical draw schedule may include:
- Site preparation and foundation
- Framing, roofing, and exterior work
- Plumbing, electrical, and mechanical systems
- Insulation, drywall, and interior finishes
- Final completion and required approvals
Borrowers considering this structure can review the general features of a construction home loan before comparing specific program terms.
One-Close vs. Two-Close Construction Loans
Choosing a financing structure is one of the first major decisions in the process. Availability and terms vary by lender, property type, occupancy, and borrower qualifications.
| Feature | One-Close Loan | Two-Close Loan |
|---|---|---|
| Structure | Construction and permanent financing are arranged in one transaction. | The construction loan and permanent mortgage are separate transactions. |
| Closings | Generally requires one closing. | Generally requires a second closing after construction. |
| Permanent Rate | May be established before construction, depending on program terms. | Usually based on available market terms when permanent financing is arranged. |
| Requalification | May reduce the need for a completely separate qualification process. | Typically requires qualification for the permanent mortgage near completion. |
| Flexibility | Provides a more integrated process but may offer fewer permanent loan choices. | May provide more flexibility to compare permanent financing after the build. |
Neither structure is automatically better for every borrower. The right choice depends on rate-risk preferences, expected construction time, closing costs, qualification strength, and the permanent mortgage options available.
What Do You Need to Qualify for a Construction Loan?
Construction financing requires lenders to evaluate both the borrower and the building project. Guidelines vary, but the following areas are commonly reviewed as of 2026.
Credit, Income, and Existing Debts
Lenders review credit history, verified income, employment or business stability, assets, and monthly obligations. Because construction has additional risks and moving parts, qualification standards may be more detailed than those for a completed home.
Self-employed borrowers may need personal and business tax returns, financial statements, bank records, or other documentation. When tax returns do not fully reflect usable cash flow, an eligible bank statement program may be worth discussing, although construction availability and requirements vary.
Down Payment or Land Equity
The required contribution depends on the program, credit profile, loan amount, occupancy, and project risk. If you already own the lot, the lender may be able to count eligible land equity toward the required contribution.
Land equity is the difference between the accepted value of the lot and any debt secured by it. The lender will determine how much equity can be credited after reviewing the title, current liens, acquisition history, and appraisal.
Cash Reserves and Contingency Funds
Lenders may require reserves in addition to funds needed for closing. A construction budget also commonly includes a contingency allowance for unexpected expenses, price changes, or approved modifications.
A contingency does not eliminate the risk of overruns. Borrowers should understand which costs are included in the contract, which costs can change, and how additional expenses will be handled.
Builder, Plans, and Budget Requirements
The lender generally reviews the builder separately from the borrower. This review may include the builder’s experience, insurance, financial condition, references, licenses where applicable, and history with similar projects.
Owner-builder arrangements are less widely available and usually face additional restrictions. Before assuming a program permits you to act as your own general contractor, verify the current lender guidelines.
The project package commonly includes:
- A signed construction contract
- Architectural plans and specifications
- A line-item budget
- A proposed draw schedule
- An estimated start and completion timeline
- Builder and subcontractor information
- Applicable permits or evidence of the permitting process
- Proof of required insurance coverage
A fixed-price contract can make the financing review more predictable, but borrowers should still examine allowances and change-order provisions carefully. Items such as appliances, landscaping, site work, utility connections, and specialty finishes may not be fully included unless the contract states otherwise.
How the Austin Area Can Affect Your Build
Construction conditions can differ across Austin, Travis County, Williamson County, Hays County, and the surrounding Texas Hill Country. A project inside Austin may follow a different permitting and utility process from a build near Dripping Springs, Buda, Kyle, Georgetown, Round Rock, or Leander.
Lots along the I-35 Corridor and in areas such as New Braunfels or San Marcos may also involve different municipal, county, utility, or site requirements. Depending on the property, borrowers may need to account for septic systems, wells, utility extensions, drainage, floodplain considerations, grading, or access improvements.
These factors can affect the budget, appraisal, and construction schedule. We recommend confirming the following before finalizing financing:
- Whether the property has confirmed utility access
- Whether subdivision or deed restrictions affect the planned design
- Whether additional engineering or site studies are needed
- Which permits and inspections apply to the property
- Whether the planned home is supported by the completed-value appraisal
What Happens During the Draw Process?
After closing, the builder submits draw requests as work reaches agreed milestones. An inspector or other approved party verifies progress, and the lender reviews the request before releasing eligible funds.
The process generally follows these steps:
- The builder completes an approved phase. Work should match the plans, specifications, and budget.
- A draw request is submitted. The request identifies completed work and the amount requested.
- An inspection is performed. The inspection confirms progress but is not a substitute for a full home inspection or quality guarantee.
- The lender reviews documentation. The lender may also require lien waivers, invoices, title updates, or other records.
- Approved funds are released. Payment is made according to the loan and construction agreements.
Borrowers should stay engaged throughout the build. Regular communication among the borrower, builder, lender, title company, and inspector can help identify documentation issues before they delay a draw.
Construction Loan Costs and Rate Considerations
Construction financing may include appraisal, inspection, title, closing, and administrative expenses. Exact charges vary by lender, property, loan structure, and location, so borrowers should review the loan estimate and construction documents carefully.
Rates for construction loans may differ from rates on completed homes because funds are advanced over time and the collateral is still being built. With a two-close structure, the permanent mortgage will typically reflect market conditions and borrower qualifications when that second loan is arranged.
If the completed loan amount is above the applicable conforming limit, a jumbo home loan may be needed for permanent financing. Conforming limits vary by year and county, so current limits and program guidelines should always be verified.
Steps to Prepare for a Custom Home Loan
- Review your financial position. Organize income, asset, credit, and debt information before committing to a project budget.
- Discuss pre-approval planning. A preliminary review can help establish a realistic financing range, but it is not a final loan approval.
- Evaluate the lot. Confirm ownership, liens, utilities, access, restrictions, and potential site-development costs.
- Select an eligible builder. Ask about experience, insurance, contract terms, allowances, warranties, and scheduling.
- Finalize plans and specifications. Detailed documents support more reliable bids, underwriting, and appraisal analysis.
- Build a complete budget. Include site work, permits, utilities, professional services, finishes, and contingency funds.
- Compare loan structures. Consider one-close and two-close options, draw procedures, reserve requirements, rates, and fees.
- Avoid major financial changes. New debts, reduced assets, or changes in income may affect qualification before or during construction.
Talk With Us About Your Austin Custom Home
A successful construction loan starts with a realistic budget, detailed plans, an eligible builder, and financing that fits both the build and the permanent mortgage. The earlier these pieces are reviewed together, the easier it is to identify potential documentation or cost issues.
Call, text, or email us to review your custom home scenario, compare available construction loan options, and understand the next steps. We can also discuss pre-approval planning for a build in Austin, New Braunfels, San Antonio, Bastrop, or other communities across Texas.
Frequently Asked Questions
Can a construction loan finance a teardown and rebuild?
Some construction programs can finance an eligible teardown and new build, but the lender must review the existing property, demolition costs, plans, permits, and completed value. The treatment of any current mortgage or property lien also depends on the transaction structure.
Does the lender have to approve my builder?
Construction lenders generally review the builder before closing, even when the borrower has already signed a contract. Requirements vary, but the review may cover experience, insurance, financial capacity, licensing where applicable, and prior projects.
What happens if construction costs exceed the approved budget?
The borrower may need to use contingency funds or provide additional documented funds, depending on the loan terms and reason for the overrun. Material changes and additional draws generally require lender review and may not be approved automatically.
Can a self-employed borrower qualify for a construction loan?
Self-employed borrowers may qualify when they meet the applicable credit, income, asset, project, and documentation requirements. The lender may review tax returns, business records, bank statements, or other documents based on the selected program.
When does a custom home require jumbo financing?
A custom home may require jumbo financing when the permanent mortgage exceeds the current conforming loan limit for the property's county. Jumbo construction guidelines commonly involve additional review of credit, reserves, income, appraisal support, and project risk.
This is educational and not financial advice. Loan programs and guidelines can change. Talk with a licensed mortgage professional about your specific scenario.
About the Author
Mission Mortgage of Texas, Inc.
Your mortgage journey begins here. Getting started on the purchase or refinance of your home is just a few minutes away. No commitment needed.
Specializes in: Conventional, FHA, Non-QM
Licensed in: TX
Company NMLS #207583
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