Financing — Construction loan
Construction loans: draw-based financing built for the build.
A construction loan funds your ADU in stages tied to construction milestones, then converts to a permanent mortgage once the unit is complete. It's the right product when you don't have enough equity for a HELOC, or when you'd rather match payments to construction draws than carry a HELOC balance.
How it works
A short-term, draw-based loan that funds construction in tranches as work progresses. Most lenders structure it as a 12–18 month construction phase that then converts to a 30-year permanent mortgage at completion — single-close (one closing) or two-close (two closings).
- Rate range
- Prime + 1–3% variable during construction (Better Place Design Build 2025) — roughly 8.75–11.5% in current conditions; permanent-phase rate locks at conversion
- Loan amount
- Based on projected as-built appraised value (typically 75–90% LTV at completion)
- Term
- 1–year construction phase typical; converts to 15- or 30-year permanent mortgage
- Best for
- Homeowners without substantial existing equity, or who want to match payments to draws rather than carrying a HELOC balance. Often the right choice when buying property and building simultaneously.
Application process
- 01Submit during Phase 3 (permits) — most construction loans require permits in hand or near-final before funding
- 02Provide W-2s, tax returns, asset statements, plus permits, full construction documents, and a contractor bid
- 03Lender orders an as-built appraisal projecting the property's value after the ADU is finished
- 04Single-close (preferred) locks construction rate and permanent rate at the same time; two-close re-locks at conversion
- 05Funds release in 4–6 draws tied to inspections (foundation, framing, MEP, drywall, completion)
Pros
- Matches how you actually pay builders — staged draws on inspection
- No need for existing equity if you're financing the full build
- Single-close structure locks your permanent rate up front
- Some lenders include construction-period interest in the loan (you don't pay during build)
Cons
- Higher rate during construction than the eventual permanent rate
- More paperwork — permits, plans, contractor qualifications, draw inspections
- Stricter contractor requirements; some loans won't fund unlicensed/owner-builder projects
- Tight project oversight — late draws can stall builders
Run the numbers on your specific loan
Use the loan calculator to compare HELOC, refi, construction, and renovation loans side by side with current rates.
Alternatives and related
FAQ
- What's the difference between a construction loan and a renovation loan?
- Construction loans (especially single-close construction-to-permanent) are designed for ground-up builds and structured for staged draws. Renovation loans like FHA 203k and Fannie Mae HomeStyle bundle renovation costs into a standard mortgage — typically lower rates but tighter on what counts as 'renovation' versus new construction. ADUs qualify under both products, but the right choice depends on your existing equity and whether you're refinancing simultaneously.
- How are construction loan draws inspected?
- Most lenders send a third-party inspector after each major construction milestone — typically foundation pour, framing complete, MEP rough-in, insulation/drywall, and final. The inspector verifies the work matches the contracted scope before the next draw releases. Builders schedule trade inspections to align with these draw inspections to avoid delays.
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