Construction Loan Types in California
One-time-close construction-to-permanent loans combine the construction phase and permanent mortgage into a single closing, saving $5,000-$10,000 in duplicate closing costs. You lock your permanent interest rate before construction begins, protecting against rate increases during the 12-18 month build period. During construction, you make interest-only payments on the amount disbursed — the lender releases funds in stages (called draws) as the contractor completes predefined milestones. After the certificate of occupancy is issued, the loan automatically converts to permanent financing with full principal-and-interest payments.
Two-time-close construction loans use separate closings for the construction phase and permanent financing. This offers more flexibility — you can shop for the best permanent rate after construction is complete — but involves two sets of closing costs. Stand-alone construction loans are short-term (12-18 months) interest-only loans that must be paid off upon completion through a separate permanent mortgage, a sale, or cash. These are common for spec builders and investors who plan to sell the finished product rather than occupy it.
California ADU Construction Financing
Accessory Dwelling Units (ADUs) have become California's most popular construction project since state legislation (AB 68, AB 881, SB 13) streamlined permitting in 2020. Financing options include construction loans for ground-up ADU builds (typically $150,000-$400,000), home equity loans or HELOCs using existing equity to fund construction, cash-out refinancing to access equity and pay the contractor directly, and renovation loans (FHA 203k, Fannie Mae HomeStyle) that finance the ADU as part of a property improvement. The completed ADU generates rental income that can be used to qualify for the financing — either as actual lease income or as market rent estimated by an appraiser.
Last updated: July 2026. Sources: California Housing and Community Development ADU regulations. Local county building department permit requirements.
Frequently Asked Questions — Construction Loans
What is a one-time-close construction loan?
A single loan covering both construction and permanent financing. You close once, lock your permanent rate before building starts, and convert automatically after completion. Saves $5,000-$10,000 in duplicate closing costs.
How much down payment do construction loans require?
20-25% based on the completed home's appraised value, not the land cost alone. A home appraised at $1M finished requires $200,000-$250,000 down.
What credit score do I need for a construction loan?
Minimum 680 for most programs. Higher scores unlock better rates and lower down payment requirements.
How do construction draws work?
The lender releases funds in stages as construction milestones are completed — typically foundation, framing, rough mechanicals, drywall, and completion. An inspector verifies each phase before releasing the next draw.
Can I be my own general contractor?
Some lenders allow owner-builder arrangements for borrowers with construction experience, but most require a licensed general contractor. Owner-builder programs typically require higher down payments.
How long do construction loans last?
The construction phase is typically 12-18 months. One-time-close loans convert to a 30-year permanent mortgage after completion. Two-time-close construction loans are paid off with separate permanent financing.
Can I finance an ADU with a construction loan?
Yes. ADU construction qualifies for Standard FHA 203k, Fannie Mae HomeStyle renovation loans, and stand-alone construction loans. California's ADU legislation has streamlined permitting.
What if construction costs exceed the budget?
A contingency reserve of 5-10% is typically required in the construction budget. Overruns beyond the contingency must be covered out of pocket or through a change order approved by the lender.
Do I make payments during construction?
During construction, you make interest-only payments on the amount disbursed (not the full loan). Payments increase as more draws are released.
Can I build on land I already own?
Yes. The equity in your land can count toward your down payment. The lender will appraise both the land and the proposed completed home.
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