Construction Loans in Texas Explained: What You Need to Know Before You Build

Construction Loans in Texas Explained

Financing a custom home is different from financing an existing home purchase. Understanding construction loans before you start will save you time, money, and stress.

What Is a Construction Loan?

A construction loan is a short-term loan that funds the building of your home. Unlike a traditional mortgage, the money is disbursed in phases called "draws" as construction milestones are completed.

Once your home is finished, the construction loan typically converts into a permanent mortgage — this is called a construction-to-permanent loan (also called a one-time close or single close loan).

Types of Construction Loans in Texas

1. Construction-to-Permanent (One-Time Close)

Most popular option for custom home buyers

One loan, one closing, one set of closing costs

Converts automatically to a 30-year mortgage at completion

Rates lock in at the start (or at conversion, depending on lender)

2. Two-Time Close Construction Loan

Separate construction loan and permanent mortgage

Two closings, two sets of closing costs

More flexibility but higher administrative burden

3. Owner-Builder Loan

For those acting as their own general contractor

Harder to qualify for; not recommended for first-time builders

How the Draw Schedule Works

Your lender releases funds in stages:

1. Foundation: 10–15% of loan disbursed

2. Framing: 20–25%

3. Mechanicals (HVAC, plumbing, electrical rough-in): 15–20%

4. Drywall & interior: 15–20%

5. Finishes & trim: 15–20%

6. Final inspection & CO: remaining balance

Your builder submits draw requests; the lender inspects and releases funds. Canyon Gate Builders manages this process on your behalf.

Down Payment Requirements

Construction loans typically require 10–20% down on the total project cost (land + construction). If you already own your land, its equity counts toward your down payment.

Example:

Land value: $80,000

Construction cost: $420,000

Total project: $500,000

Required 20% down: $100,000

Land equity covers $80,000 → you need only $20,000 additional cash

Qualifying for a Construction Loan in Texas

Lenders evaluate:

Credit score (typically 680+ minimum, 720+ for best rates)

Debt-to-income ratio (usually 43% or lower)

Employment history (2+ years preferred)

Signed construction contract with a licensed builder

Approved plans and specifications

Interest During Construction

You pay interest-only during the construction phase, only on the amount drawn. As draws increase, your monthly interest payment increases. This is typically significantly lower than a full mortgage payment.

Recommended Lenders in the RGV

We work with several trusted construction lenders in the Rio Grande Valley who understand the local market and builder process. Ask us for referrals when you schedule your consultation.

Call (956) 414-3558 or schedule a consultation to discuss financing options.