Construction Loan Requirements
The borrower is only half the file. The builder, the plans and the budget are the other half.
By Mike Basti, Licensed Mortgage Broker (NMLS #377740) · Updated September 2026
Two Things Get Underwritten
A construction loan underwrites you and the project. Most borrowers prepare thoroughly for the first and are caught out by the second.
The project side means approved plans, a licensed and vetted builder, a detailed line-item budget, a realistic timeline, and an appraisal based on the completed value rather than the current site.
Borrower Requirements
| Requirement | Typical standard |
|---|---|
| Down payment | 20–25% of total project cost |
| Credit score | 680 minimum, 700+ preferred |
| Debt-to-income | 43–45% maximum |
| Reserves | 6–12 months of payments after closing |
| Income documentation | Full documentation typical; some non-QM options exist |
Builder and Project Requirements
The builder is vetted almost as closely as the borrower. Expect the lender to require an active California contractor licence in good standing, general liability and workers compensation insurance, a track record of comparable completed projects, financial statements, and references.
Owner-builder arrangements — where you act as your own general contractor — are accepted by only a minority of lenders and usually require documented construction experience.
- Approved plans and specifications, permit-ready
- Line-item cost breakdown covering the entire build
- A signed fixed-price or guaranteed-maximum contract
- Contingency reserve, typically 5% to 10% of budget
- Realistic timeline with defined milestones
Contingency is not optional
Lenders require a contingency line of 5% to 10% because construction budgets overrun. If you have not built one in, the lender will add it to the total project cost — which raises the amount you must fund as down payment. Budget the contingency before you calculate what you need to bring.
How Draws Work
Funds are not disbursed at closing. They are released in stages as work is inspected and verified — typically five to eight draws across foundation, framing, mechanicals, drywall, finishes and completion.
You pay interest only on the amount drawn to date, so payments start small and rise as the build progresses. Each draw requires an inspection, and in some counties lien releases from subcontractors before the next release.
Construction-to-Permanent Versus Two-Close
A construction-to-permanent loan converts automatically into a standard mortgage at completion, with one closing and one set of costs. A two-close structure means a separate construction loan and then a refinance, with two sets of closing costs but the ability to shop the permanent loan.
One-close is usually cheaper and removes the risk of not qualifying for the permanent loan later. Two-close can win if you expect rates to fall or your income position to improve materially during the build.
California-Specific Factors
Permitting timelines vary enormously by jurisdiction, and coastal properties may require Coastal Commission review that adds months. Seismic requirements, fire-zone building standards in wildland-urban interface areas, and Title 24 energy compliance all affect both cost and schedule.
Build realistic permitting time into the timeline you give the lender. An optimistic schedule that slips can trigger extension fees.
Related Pages
Frequently Asked Questions
What are the requirements for a construction loan in California?
Typically 20% to 25% down on total project cost, a credit score of 680 or better, debt-to-income under 43% to 45%, and six to twelve months of reserves. The project also needs approved plans, a licensed vetted builder, a line-item budget with contingency, and an appraisal based on completed value.
How much down payment does a construction loan need?
Usually 20% to 25% of total project cost — land plus construction, not just the build. Because lenders add a 5% to 10% contingency to the budget if you have not, the amount you must fund is often higher than borrowers first calculate.
Can I be my own general contractor?
Only a minority of lenders permit owner-builder arrangements, and those that do usually require documented construction experience. Most require a licensed California contractor in good standing with liability and workers compensation insurance plus a track record of comparable projects.
How do construction loan draws work?
Funds release in stages as work is inspected, typically five to eight draws across foundation, framing, mechanicals, drywall, finishes and completion. You pay interest only on what has been drawn, so payments start small and rise through the build. Each draw requires inspection and sometimes subcontractor lien releases.
What is construction-to-permanent financing?
A single loan that converts automatically into a standard mortgage at completion, with one closing and one set of costs. The alternative is a two-close structure with a separate construction loan and later refinance — two sets of costs, but the ability to shop the permanent loan.
Why do lenders require a contingency reserve?
Because construction budgets overrun. Lenders require 5% to 10% of budget as contingency, and will add it themselves if you have not, which raises total project cost and therefore your required down payment. Build it in before calculating what you need to bring.
Educational information only, not a commitment to lend. Program terms vary by lender and are subject to credit approval. Figures reflect 2026 program limits. Sources: FHFA, HUD, VA, CFPB, California DRE. Sponsored by Save Financial, Inc. (NMLS #377740). California DRE #01875766. Equal Housing Lender.
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