Get a Home Construction Loan in Texas: The Definitive Borrower's Resource

Securing a home construction loan in Texas is the critical first step to building your custom dream home from the ground up. Unlike a traditional mortgage, this specialized financing is designed to cover everything from the land and permits to labor and materials, releasing funds in stages as your build progresses.

This resource provides a clear path through the entire process. It details the different types of construction loans available in Texas, what lenders look for in an applicant, how to navigate the draw process, and how to understand the unique legal landscape of the Lone Star State, ensuring you can break ground with confidence.

The Anatomy of a Texas Home Construction Loan

A home construction loan is fundamentally different from the standard mortgage used to purchase an existing home. It is a short-term financing tool, typically lasting for the duration of the build—often around 12 months—designed specifically to fund the costs of creating a new residence from scratch.

How Funds Are Disbursed

Instead of providing a single lump sum at closing, the lender disburses the funds in a series of payments known as "draws" or "advances". These draws are tied to specific, pre-agreed-upon milestones in the construction schedule, such as the completion of the foundation, framing, or installation of mechanical systems.

During this construction phase, the borrower typically makes interest-only payments, and only on the amount of money that has been drawn to date. This structure keeps monthly payments lower while the home is being built. Once construction is finished and the final inspection is passed, the short-term construction loan must be settled. This is accomplished either by the borrower obtaining a separate, permanent mortgage to pay it off or, more commonly, by the construction loan automatically converting into a traditional, long-term mortgage.

The Lender's Role and Project Oversight

The very structure of a construction loan transforms the lender into an active partner in the project. A traditional mortgage is secured by a finished, tangible house that an appraiser can see and value. A construction loan, however, is secured by a set of plans and a promise—an asset that does not yet exist. This inherently elevates the risk for the financial institution.

To mitigate this risk, lenders implement the draw process as a powerful project management and oversight tool. Before releasing funds for the next phase, the lender will almost always send an inspector to the job site to verify that the work claimed has been completed satisfactorily and in accordance with the approved plans.

This system of checks and balances provides a crucial layer of protection for the homeowner as well. It ensures the builder is held accountable for progress and prevents a scenario where they are paid for incomplete or substandard work. It also discourages the diversion of funds to other projects, ensuring the money borrowed is being used exclusively to build the specified home. In this way, the loan's mechanics provide a framework for project governance that benefits all parties involved.

Key Types of Construction Loans Available in Texas

When pursuing a new build in Texas, borrowers will encounter several distinct types of construction loan products. Choosing the right one depends on the borrower's financial situation, risk tolerance, and long-term goals for the property.

The Construction-to-Permanent (One-Time Close) Loan

The most popular and often most advantageous option for future homeowners is the construction-to-permanent loan, commonly referred to as a "one-time close" or "single-close" loan. This product seamlessly combines the short-term construction financing and the long-term permanent mortgage into a single, unified loan. The borrower goes through one application, one underwriting process, and one closing at the very beginning of the project.

The primary benefits of this structure are significant savings in both time and money. By avoiding a second closing, the borrower eliminates a duplicate set of closing costs, which can amount to thousands of dollars. Perhaps more importantly, the interest rate for the permanent mortgage is locked in before the first shovel of dirt is turned. This removes the considerable risk of interest rates rising during the 12-month or longer construction period, providing financial certainty and peace of mind. Once construction is complete, the loan automatically converts to a standard principal-and-interest mortgage without any additional paperwork or fees.

The Stand-Alone Construction (Two-Time Close) Loan

An alternative is the stand-alone construction loan, also known as a "two-time close" loan. This approach treats the financing as two entirely separate transactions. First, the borrower secures a short-term, interest-only loan that covers only the building phase. Upon the home's completion, the borrower must then apply for and close on a completely new, traditional mortgage to pay off the construction loan balance.

This path involves two full sets of closing costs and fees, making it more expensive. It also exposes the borrower to significant interest rate risk, as the rate for the permanent mortgage is not determined until the home is finished and ready to be financed. If market rates have increased during the build, the borrower could face a much higher monthly payment than originally anticipated.

However, this option can offer more flexibility. It may be suitable for professional builders constructing a home on speculation or for borrowers who have a smaller down payment available for the initial construction phase but anticipate being in a stronger financial position for the permanent mortgage.

Owner-Builder Loans: The High-Risk, High-Reward Path

For individuals who are licensed contractors or possess extensive, verifiable experience in home building, an owner-builder loan may seem like an attractive option. This loan allows the homeowner to act as their own general contractor, managing the project and subcontractors directly. However, these loans are exceedingly rare and difficult to obtain from traditional lenders, who view them as exceptionally high-risk.

The scarcity of owner-builder loans in Texas is not merely a matter of lender caution; it is a direct consequence of the state's uniquely powerful homestead laws. Texas law provides some of the nation's strongest protections for a primary residence, making it very difficult for creditors to place a valid lien on a homestead property.

For a contractor's lien to be enforceable, the law demands a strict set of procedures, including a written contract signed by both spouses and filed with the county before any work begins. When the property owner is also the builder, the clear contractual distinction between "owner" and "contractor" becomes dangerously blurred. This legal ambiguity creates a potential vulnerability for the lender. If the owner-builder were to default on the loan, the lender's ability to foreclose could be challenged under the Texas Homestead Act, putting their collateral at risk.

Some Texas-based lenders address this risk by explicitly prohibiting the homeowner from acting as the contractor on any project that will become their homestead property. This legal landscape, specific to Texas, is the primary reason most lenders in the state will only finance projects managed by an approved, third-party builder.

Government-Backed Construction Loans (VA, FHA, USDA)

Several government-backed programs offer accessible pathways to construction financing, often with more lenient qualification requirements, particularly regarding the down payment.

• VA Construction Loans: For eligible veterans, active-duty service members, and surviving spouses, the U.S. Department of Veterans Affairs (VA) guarantees a portion of the loan, allowing approved lenders to offer up to 100% financing. This means a qualified veteran can build a home with zero money down. These are typically offered as one-time close loans, simplifying the process.
• FHA Construction Loans: The Federal Housing Administration (FHA) insures these loans, making them a viable option for borrowers with lower credit scores or limited savings. FHA construction-to-permanent loans allow for down payments as low as 3.5%.
• USDA Construction Loans: The U.S. Department of Agriculture (USDA) offers its Section 502 Guaranteed Loan Program to encourage homeownership in designated rural areas. Similar to VA loans, the USDA program can provide 100% financing to eligible low- and moderate-income borrowers, meaning no down payment is required to build a home.

The Qualification Gauntlet: Meeting Texas Lender Requirements

Qualifying for a construction loan is a more rigorous and document-intensive process than applying for a standard mortgage. Lenders are underwriting not just a borrower, but an entire construction project. A successful application rests on the strength and alignment of three interdependent pillars: the borrower's financial profile, the builder's qualifications, and the project's viability. A weakness in any one of these areas can jeopardize the entire loan, regardless of the strength of the others.

Your Financial Profile: Credit, Income, and Debt

Lenders need to be confident in the borrower's ability to manage their finances and handle the loan payments, especially since they will be carrying their current housing costs in addition to the new loan's interest-only payments.

• Good Credit History: Most lenders in Texas set a minimum credit score of 680 to qualify for a construction loan. A higher score will not only increase the chances of approval but will also likely result in more favorable interest rates and terms.
• Low Debt-to-Income (DTI) Ratio: The DTI ratio compares total monthly debt payments to gross monthly income. Lenders use this to assess a borrower's capacity to take on new debt. A common benchmark for construction loans is a DTI of 43% or lower.
• Sufficient Income & Reserves: Applicants must provide proof of stable and sufficient income through tax returns, pay stubs, and bank statements. Lenders also typically require borrowers to have significant liquid assets, or cash reserves, to act as a contingency fund for unexpected costs or delays during construction.

The Down Payment: Your "Skin in the Game"

Because the loan is not initially secured by a completed home, lenders require a substantial down payment as a sign of the borrower's commitment to the project.

• Standard Requirement: While some programs may allow for less, the industry standard down payment for a construction loan is 20% or more of the total project cost (which includes the land, soft costs like permits, and hard construction costs).
• Land Equity: For borrowers who already own the land where they plan to build, the equity in that property can often be used to satisfy all or part of the down payment requirement. If the land is owned free and clear and its value is at least 20-25% of the total project cost, the borrower may not need to bring additional cash to the closing.

The Builder Vetting Process

The builder is arguably the most critical variable in the success of the project, and lenders treat them as such. An applicant could have a perfect credit score and a 50% cash down payment, but if their chosen builder is not deemed qualified by the lender, the loan will likely be denied. The lender must approve the builder, and this involves a thorough vetting process where they will scrutinize the builder's:

• License and Insurance: The builder must be fully licensed and carry adequate liability and workers' compensation insurance.
• Financial Stability: Lenders will review the builder's financial statements to ensure they are solvent and capable of managing the project's cash flow.
• Experience and Reputation: The lender will want to see a portfolio of completed projects similar in scope to the proposed build and may check references. Many lenders maintain a list of pre-approved builders or require the builder to register with their specific construction loan program.

The Project "Blue Book": Your Detailed Plans

Finally, the project itself must be thoroughly planned and documented. A great borrower and a top-tier builder could still be rejected if their project plans are vague, their budget is unrealistic, or the home's projected value doesn't support the loan amount. The borrower must submit a comprehensive package of documents, sometimes referred to as a "blue book," that gives the lender a complete picture of the proposed home.

This package must include:

• A complete set of architectural plans and blueprints.
• A detailed, line-item budget breaking down all hard and soft costs.
• A list of material specifications (e.g., flooring, fixtures, finishes).
• A proposed construction timeline and draw schedule.
• A signed contract between the borrower and the builder.

The Construction Loan Process in Texas: From Groundbreaking to Move-In

Navigating the construction loan process can feel complex, but it follows a logical sequence of steps designed to move the project from concept to completion while protecting all parties involved.

1. Get Pre-Approved: Before selecting a builder or finalizing plans, the first step is to get pre-approved with a lender. This involves a preliminary review of the borrower's finances to determine a realistic budget. A pre-approval letter demonstrates to builders that the prospective client is a serious and qualified buyer.
2. Select a Builder and Finalize Plans: With a budget in hand, the borrower can now select a builder that meets both their vision and the lender's vetting requirements. Together, the borrower and builder will finalize the architectural plans, budget, and all other documents required for the project's "blue book".
3. Submit the Full Loan Application: The borrower formally applies for the loan by submitting their complete financial documentation alongside the comprehensive package of project plans from the builder.
4. Underwriting and Appraisal: The lender's underwriting department conducts a deep dive into all submitted documents—reviewing the borrower's credit, the builder's qualifications, and the project's feasibility. A crucial part of this stage is the appraisal. An appraiser will analyze the plans, specifications, and the value of the lot to determine the home's "as-completed" value. This future value is what secures the loan.
5. Closing: Once the loan is approved, the borrower attends the closing to sign all the necessary legal documents. For a one-time close loan, this single event covers both the construction phase and the permanent mortgage that will follow.
6. The Draw Process in Action: This is the heart of the construction phase. The process repeats in a cycle until the home is finished:
   • The builder completes a pre-defined stage of work, such as pouring the foundation.
   • The builder submits a draw request to the lender for the funds allocated to that stage. This request is typically accompanied by invoices and lien waivers from any subcontractors or suppliers who performed the work.
   • The lender dispatches an inspector to the construction site to verify that the work is complete and meets quality standards.
   • Upon the inspector's approval, the lender releases the funds. The payment is typically made to a title company, which then disburses the money to the builder and subcontractors.
   • The borrower begins making interest-only payments on the cumulative amount of funds that have been disbursed to date.
7. Final Inspection and Conversion to Permanent Mortgage: When the builder reports that the home is finished, a final inspection is conducted by the lender's appraiser to confirm completion according to the plans. A Certificate of Occupancy from the local municipality will also be required. For a one-time close loan, this final approval triggers the automatic conversion of the loan into a standard, amortizing mortgage, and the borrower begins making regular principal and interest payments. For a two-time close loan, the borrower must now go through the full process of applying for and closing on their permanent mortgage.

Understanding the Costs: Rates, Fees, and Closing in Texas

Building a home is a significant financial undertaking, and it's essential for borrowers to have a clear understanding of all the associated costs beyond the price of labor and materials.

Construction Loan Interest Rates

Due to the higher risk profile for lenders, construction loan interest rates are almost always higher than those for traditional mortgages on existing homes, often by a percentage point or more. These rates are typically variable during the construction phase, often tied to a benchmark like the Prime Rate.

For construction-to-permanent loans, the rate for the permanent mortgage portion can be locked in at the beginning, but the interest rate during the construction period itself will fluctuate. Published rates can vary widely based on the lender, the borrower's credit profile, and market conditions at the time of application.

Common Fees

Beyond interest, a construction loan involves a variety of fees. These can include:

• Origination Fee: A charge from the lender for processing the loan, often calculated as a percentage of the total loan amount.
• Appraisal Fee: To pay for the initial "as-completed" value appraisal.
• Inspection Fees: A fee for each draw inspection conducted during the build.
• Title Insurance: Policies to protect both the lender and the owner from potential title defects.
• Permit Fees: Costs paid to local municipalities for building permits.
• Survey Fee: To officially establish the property's boundaries.

Closing Costs in Texas

The total closing costs for a new construction loan in Texas typically fall between 2% and 5% of the total loan amount. A significant advantage for Texas homebuyers is the absence of state or local real estate transfer taxes, which can be a substantial expense in other states.

Typical closing costs are grouped into several categories:

• Lender Fees: These include the origination fee, underwriting fees, and processing fees charged by the financial institution for creating the loan.
• Title and Escrow Fees: These cover the costs of the title search, settlement services provided by the title company, and the premiums for both the lender's and owner's title insurance policies.
• Third-Party Fees: These are charges for services rendered by other professionals, including the appraiser, surveyor, and inspectors.
• Prepaid Items: Borrowers are typically required to pay the first full year's homeowner's insurance premium at closing. They also must fund an escrow account with several months' worth of property taxes and homeowner's insurance premiums to ensure these future bills can be paid on time.

The Texas Legal Landscape: A Homeowner's Guide to Homesteads and Liens

Texas has a unique and robust set of property laws that every prospective home builder should understand. These laws, particularly those concerning homestead rights and mechanic's liens, provide powerful protections for homeowners but require strict adherence to specific procedures during a new construction project.

Understanding Your Texas Homestead Rights

In Texas, a primary residence is known as a homestead. The Texas Constitution provides the homestead with extraordinary protection from forced sale to satisfy debts from most creditors. This means that in many cases, even if a creditor wins a lawsuit against a homeowner, they cannot force the sale of their home to collect the judgment.

However, this protection is not absolute. A lender can foreclose on a homestead for specific types of debt, including the mortgage used to purchase or build the home, property taxes, and a validly executed mechanic's lien.

How Mechanic's Liens Work in a Texas New Build

A mechanic's lien is a legal claim against a property made by a contractor, subcontractor, or material supplier who has not been paid for labor or materials they provided for the improvement of that property. If valid, this lien can cloud the property's title and, in some cases, lead to foreclosure.

Because of the state's strong homestead protections, the requirements for a contractor or supplier to place a valid mechanic's lien on a homestead property in Texas are extremely strict and unforgiving. For a lien to be enforceable against a new-build homestead, the following conditions must be met without fail:

1. There must be a written contract detailing the terms of the agreement.
2. The contract must be signed by all owners—meaning both spouses if the owner is married—before any work commences or any materials are delivered. A contract signed after work has started is invalid for lien purposes.
3. The written contract must be filed with the county clerk in the county where the property is located.
4. The contract must contain specific warning language, as mandated by the Texas Property Code, that informs the homeowner of their rights and the risk of losing their home if they fail to meet the contract's terms.

Protecting Yourself from Invalid Liens

Texas law provides homeowners with additional tools to protect themselves during construction. The most significant of these is "retainage." Property owners are required to withhold, or "retain," 10% of the total contract price (or 10% of the value of the work) from the general contractor. This fund must be held for 30 days after the project is officially completed. The purpose of this retainage is to create a pool of money that can be used to pay any subcontractors or suppliers who file a lien because they were not paid by the general contractor.

If a contractor attempts to file a lien without following the strict legal procedures required for a homestead, the lien is invalid and unenforceable. In such cases, a homeowner has legal recourse to have the fraudulent lien removed from their property records and may even be able to sue the contractor for damages and attorney's fees. For detailed legal statutes, homeowners can refer to Chapter 53 of the Texas Property Code.

Finding Your Lending Partner in the Lone Star State

Choosing the right lender is as important as choosing the right builder. Borrowers should seek out financial institutions and loan officers with specific, demonstrable experience in construction lending.

Types of Lenders to Consider

• Community Banks & Credit Unions: These local institutions often possess deep knowledge of the regional construction market, permitting processes, and reputable builders. They may offer more personalized service and flexible underwriting.
• Regional & National Banks: Larger banks can offer competitive rates and often have sophisticated online platforms and streamlined processes. They are a common source for construction financing.
• Mortgage Brokers: A mortgage broker works with multiple lenders and can shop a borrower's loan application to find the most competitive rates and terms available, which can be particularly helpful for a complex product like a construction loan.
• Hard Money Lenders: For real estate investors or borrowers with unconventional projects who may not meet the strict criteria of traditional banks, private or "hard money" lenders are an option. This path comes with significantly higher interest rates and fees and is generally not suitable for a primary residence build.

Lenders in Major Texas Metro Areas

While many lenders operate statewide, borrowers often find success working with institutions that have a strong presence in their local market.

• Houston Area Lenders: Prospective builders in the Houston metro can explore options from institutions such as Smart Financial Credit Union, RBFCU, Capital Home Mortgage, Texas First Bank, and Central Bank.
• Dallas-Fort Worth Area Lenders: In the DFW Metroplex, lenders with construction programs include Capital Fund 1, American National Bank of Texas (ANBTX), Broadway Bank, First Bank Texas, and United Texas Bank.
• Austin Area Lenders: The Austin market features lenders like SouthStar Bank, MortgageATX, Park Place Finance, and Austin Capital Mortgage that offer construction financing solutions.
• San Antonio Area Lenders: In and around San Antonio, borrowers can connect with lenders such as Jefferson Bank, IRC Capital, American Bank, Capital Home Mortgage, Texas Farm Credit, and Broadway Bank.

Before engaging with any lender, it is prudent for consumers to verify their license and standing through the Texas Department of Savings and Mortgage Lending.

Building Your Texas Dream with Financial Confidence

The journey to building a custom home in Texas is intricate, but it is far from insurmountable. A construction loan is not a simple transaction but a structured process that requires diligence, planning, and a strong team. The one-time close loan often presents the most secure and cost-effective path for homeowners, while a successful qualification hinges on the combined strength of the borrower, the builder, and the project itself.

Understanding the unique legal protections afforded by Texas homestead law is not just an academic exercise; it is a homeowner's most powerful shield. By grasping the fundamentals of the draw process, anticipating the costs, and adhering to the legal requirements, aspiring builders can transform a complex financial process into a manageable series of steps.

With careful preparation and the right partners, the rewarding experience of turning a blueprint into a Texas home is well within reach. The logical first step on this path is to assess financial readiness and begin a conversation with a local, experienced construction loan officer to secure a pre-approval.

Frequently Asked Questions