Short answer: Most custom homes in Texas are funded with a construction loan — a short-term loan (usually 12–18 months) that releases money in stages as the home is built, on which you pay interest only on what’s been drawn. When the home is finished, a construction-to-permanent loan converts automatically into a standard mortgage. Here’s how it actually works.
What a construction loan is
Unlike a traditional mortgage that hands over a lump sum, a construction loan disburses funds gradually as your build hits milestones. The loan term is short — generally 12 to 18 months, matching the build — and is designed to cover construction costs while the home takes shape.
The draw schedule
Funds are released through a draw schedule tied to phases of the build — foundation, framing, mechanicals, finishes, and completion. Builders and lenders typically structure 5–6 draws, each releasing roughly 16–20% of the loan. Before each draw is released, the lender sends an inspector to verify the work for that stage is complete. That inspect-then-release cycle protects both you and the lender.
Interest-only during construction
Throughout the build you make interest-only payments on the amount drawn so far — not the full loan. Early in the project, when little has been disbursed, payments are small; they grow as more of the loan is drawn.
Construction-to-permanent vs. two-time close
A construction-to-permanent (“one-time close”) loan converts into a standard mortgage automatically when the home is finished, saving a second set of closing costs. A two-time-close approach uses a separate construction loan and then a new mortgage — occasionally a better fit, but usually more expensive.
What lenders look for
Expect lenders to review your credit, income, down payment, the builder’s credentials, the plans, and a fixed or well-defined budget. The more finalized your plans and contract are, the smoother approval goes.
Frequently asked questions
How long is a construction loan?
Typically 12–18 months — the time allotted for the build — after which a construction-to-permanent loan converts to a mortgage.
Do I pay the full loan amount during construction?
No. You pay interest only on the funds drawn to date, so payments start small and grow as the build progresses.
Who orders the draw inspections?
The lender, before releasing each draw, to confirm the milestone work is complete.
Planning your budget and financing? Request a free consultation and we’ll help you align your build plan with your loan. (This is general information, not financial advice — confirm details with your lender.)