What is a conventional construction loan?
A conventional construction loan is construction financing that is not backed by a government program such as VA. It typically funds the building of a home in stages and is underwritten against the plans, specifications, construction contract, budget, the land and an appraisal of the completed property. It is a common structure for Florida borrowers building a primary residence or a second home who are not using a VA benefit, though specific program availability depends on the lender.
How is it different from a regular mortgage?
On a standard purchase, the lender is valuing a finished house and disbursing the funds at closing. On a construction loan, there is nothing to inspect yet, so the file is built around documentation: what will be built, by whom, for how much, and what it should be worth when it is done. Funds then typically move in draws as work is completed rather than all at once.
| Standard purchase mortgage | Conventional construction loan |
|---|---|
| Appraises an existing home | Appraises the home as it will be once completed |
| Funds disbursed in full at closing | Funds typically released in draws as work is verified |
| Full principal and interest payments start immediately | Interest-only on drawn funds during construction, in many programs |
| Borrower and property reviewed | Borrower, property, builder and construction budget reviewed |
Qualifying for conventional construction financing
Conventional programs generally review the familiar pillars — credit history, income and employment stability, assets and reserves, and total debt relative to income. Construction typically adds a second layer of review focused on the project itself: whether the plans, contract and budget hang together, whether the builder is acceptable to the lender, and whether the as-completed appraisal supports the financing. Exact credit, income and reserve expectations vary by loan program and lender.
Because construction loans carry more moving parts than a purchase, reserves often matter more than they would on a standard mortgage. Many lenders want to see that a borrower can absorb an overage or a delay without the project stalling, though the amount of reserves required varies by program.
Down payment, land equity and the as-completed value
Rather than a simple percentage of a sale price, conventional construction financing is typically measured against total project cost and the appraised as-completed value. Your required contribution depends on which of those two numbers governs under the program, how much equity you already have in the land, and lender-specific guidelines.
If you own your lot outright, that value is generally counted toward your contribution, subject to lender review. If you are buying land as part of the project, the acquisition cost typically becomes part of the total project cost. See how using land equity for construction can factor into the transaction.
Choosing your structure
Conventional construction financing generally comes in two broad shapes. A one-time close, or construction-to-permanent, loan handles construction and the permanent mortgage in a single closing. A two-close structure funds construction first and then requires a separate permanent loan at completion. Each has trade-offs around closing costs, rate certainty and flexibility, and availability of each structure depends on the lender and program. Compare one-time close and two-close construction loans.
The construction budget and draw schedule
The line-item budget submitted with your contract typically becomes the basis for the draw schedule. Each milestone generally releases funds only after the corresponding work is verified, subject to the lender's inspection process. On Florida projects it is important that the budget captures site work honestly — clearing, fill, drainage, driveway, utility connections and, on rural parcels, well and septic where municipal utilities are not available. Those numbers are easy to underestimate and hard to add later.
Florida factors that affect a conventional construction file
- Insurability. The completed home generally needs to be insurable, which means windstorm and, where applicable, flood coverage need to be available and budgeted for — insurance availability and cost can vary significantly by county and coastal exposure.
- Flood zone and elevation. A parcel's flood designation can change both the design and the cost of the home, including elevation requirements, which can flow through to the appraisal and the budget.
- County permitting and impact fees. Timelines and impact fees vary considerably by county and municipality and should be reflected in the construction schedule and budget.
- Well, septic and utilities. Parcels without access to municipal water and sewer typically require well and septic systems, which add cost, timeline and, in some cases, additional permitting and inspections.
- Surveys and inspections. A current survey and periodic construction inspections are generally part of the file, both for the lender's draw process and for permitting.
- Appraisal comparables. Custom homes in rural markets can sometimes be harder to support with comparable sales than the same home in a subdivision.
What to gather before you apply
Standard income, asset and credit documentation, plus a construction package that typically includes: a signed contract, complete plans, specifications, a line-item budget, builder licensing and insurance, the deed or purchase contract for the land, a current survey, and permit information. Exact documentation requirements vary by lender and program. The general list is on our Florida construction loan requirements page, and a typical sequence is laid out on the construction loan process page. For a broader overview, see how construction loans work in Florida.