Purchase a HomeRefinance My Home
A construction home loan is a specialized form of financing designed to support the building of a new home from the ground up. Unlike a traditional mortgage, which is used to purchase a completed property, a construction loan covers the costs of materials, labor, permits, and land preparation in phases as the project progresses.
This type of loan is typically short-term and converts into a traditional mortgage once the construction is complete. For many aspiring homeowners in Denver, especially those looking to build a custom home, understanding how construction financing works is essential for turning blueprints into reality.
The structure of a construction loan is unique. Funds are disbursed in increments—known as “draws”—as different stages of the construction are completed. This staged approach provides oversight and ensures that the funds are used strictly for the home-building process.
Additionally, the approval process for a construction loan is more complex and involves additional parties, such as the builder and project appraisers. Because there’s no finished home as collateral upfront, lenders apply more scrutiny to safeguard their investment and help ensure the borrower can carry the financial load until the home is finished.
Like any mortgage, the borrower must be approved based on income, credit score, debt-to-income ratio, assets, and intended occupancy. However, construction loan underwriting includes one additional challenge—especially for current homeowners. If you’re planning to live in your existing home while the new one is being built, you may need to qualify for both housing payments at the same time.
For renters, this part is usually simpler, as lenders typically exclude rent from long-term obligations, assuming the lease will end when the new home is ready.
The lender also needs to approve your builder. Most lenders want evidence that the builder has at least 2–3 years of experience with projects of similar scope. They’ll request documentation such as licenses, insurance, subcontractor references, and supplier history.
If the builder lacks experience or licensing, it can delay or even derail the approval process. Choosing a reputable, vetted builder is one of the most critical steps in securing a construction loan.
Lastly, the project itself must be reviewed and approved. Lenders require:
The appraiser uses these documents to assign a projected value to the completed home. This projected value—along with the detailed cost—becomes the basis for how much the lender is willing to finance. Keep in mind: no funds will be disbursed until you obtain all required permits.
It’s possible to use a construction loan to finance the land purchase as well, but it’s far from simple. The entire project must be approved before the loan is funded, which means your seller would need to be exceptionally patient. That’s rarely the case.
For this reason, many buyers secure the land with a separate land loan first, then roll it into a construction loan later. However, even that route comes with its own challenges. Most lenders won’t finance raw land unless utilities—such as power, water, and sewer—are readily available. If you’re planning on using a well or septic system, additional permits and drilling documentation are often required before approval.
Building a home is a significant investment, and much of that investment comes before the first brick is laid. Let’s walk through a common scenario:
If your lender agrees to cover 80% of the cost, they would finance up to $708,000. That leaves $177,000 that needs to come from your own pocket—either through cash savings or the equity in the land.
In many cases, you’ll need to front soft costs and part of the down payment before the construction loan can close. That means having access to substantial liquid assets well in advance.
One key factor that can work in your favor is the length of time you’ve owned your land.
If you’ve owned the land for more than a year, lenders may allow you to use its current appraised value rather than the original purchase price when calculating your equity. This can significantly reduce your cash requirement at closing.
For example, if you bought your land a year ago for $350,000 and it’s now worth $450,000, you could unlock that increased value as part of your contribution, reducing how much additional cash you need to bring in.
During the construction phase, your loan will typically be interest-only, meaning you’ll only pay interest on the amount disbursed at each draw. Most lenders do not offer fixed rates during construction. Instead, you’ll have a variable rate during the build period, with the option to lock in a fixed rate once construction is complete.
This means you may face interest rate risk during the 6–12 months it takes to complete your home. Some lenders allow rate locks upfront, but this varies—so be sure to ask your lender about their policies.
It’s tempting to pay upfront for design, materials, or contractor deposits while you’re waiting for your construction loan to finalize. However, not all lenders will reimburse those expenses, especially if they weren’t pre-approved.
Before spending any money, talk to your lender about their draw process and reimbursement rules. Unexpected out-of-pocket costs can disrupt your budget and timeline if you’re not prepared.
Construction loans are far from one-size-fits-all. Some lenders specialize in single-close construction-to-permanent loans, while others prefer two-step financing. Terms, rates, draw schedules, and approval timelines vary widely.
Ask potential lenders questions like:
Working with a lender who understands local zoning, permitting, and builder dynamics—like Miranda Mortgage in Denver—can make the difference between a smooth project and a stressful one.
At Miranda Mortgage, we know what it takes to finance a home build in the Denver area. Whether you’re building in the suburbs, foothills, or urban infill zones, our team brings hands-on knowledge to support your goals.
We offer:
Our goal is to remove confusion, reduce risk, and help you move into your custom home with confidence.
Building a custom home can be one of life’s most rewarding projects, but it requires careful planning and the right financial partner. A construction home loan offers the flexibility and structure to bring your vision to life—but only if you understand the process and prepare thoroughly.
From selecting a qualified builder to managing draw schedules and funding timelines, each phase of the loan has its nuances. At Miranda Mortgage, we’re here to walk you through every step with clarity and care. Contact us today to learn how we can help finance your dream home from the ground up.
Phone: 303.520.1786
Email: Naiely@BarrettFinancial.com
Serving: Denver Metro & Colorado statewide.
