How to Use a Construction Loan to Build Your Ideal Home

A construction loan can help you finance building a new house, renovation, or making an addition to your current home.


home under construction

What We'll Cover

  • What a construction loan is and how they work
  • How to qualify for a construction loan
  • The difference between construction loans and traditional mortgage loans
  • The benefits of a construction loan

If you’ve had a hard time finding your ideal home, it might be time to think about building a house from the ground up. A home construction loan can help you finance your home-building project, whether you’re starting from scratch, making an addition to your existing home or doing a complete renovation.


What Is a Construction Loan?

A construction loan is a short-term loan that can help you finance building a home or other real estate project. If you’re considering building a house, renovating or creating an addition to your current home, you can take out a loan to cover the cost of the project.

Depending on the financial institution, you’d either refinance the loan into a longer-term loan once construction is complete or get a new loan to pay off the construction loan. With OneAZ however, we offer a one-time closing on construction loans with permanent financing.

Construction loans can cover costs such as:

  • The price of the land or lot
  • Labor costs for contractors
  • Building materials
  • Permits and fees
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Now offering 7-year ARM and 30-year fixed-rate home construction loans!

One-time closing with a OneAZ Construction loan

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How Does a Construction Loan Work?

A OneAZ construction loan has a simple four-step process.

  1. Consult. First, you’ll speak with a certified loan construction specialist. They’ll help identify your financial needs and get you set up with the best product.
  2. Apply. Next, you’ll apply with your loan specialist, submitting your budget, detailed plans and construction timelines.
  3. Close and Fund. You’ll close on your construction loan and an interest reserve account is established up front.
  4. Build. The fun begins! While your dream home is being built, your construction loan can cover your payments.
  5. Move in. Your construction loan will be rolled into the permanent financing for your new dream home!

What’s the Difference Between a Construction Loan and a Mortgage Loan?

When looking at buying vs. building a home, it’s important to know the differences between a mortgage loan and a construction loan.

  • Length of term. Construction periods are short-term, usually around a year. OneAZ offers 12- or 18-month construction periods. Mortgages are long-term. A OneAZ construction loan differs in that it’s a one-time close, so your construction loan becomes your mortgage loan once construction is complete.
  • How loans are disbursed. At funding, an interest reserve account is established so that while your home is being built, your loan can cover your payments.
  • Repayment. Construction loans are interest-only payments until the construction period is complete. Mortgage payments typically consist of principal and interest.
  • Rates. Traditional mortgage loans carry fixed rates, while construction loans can have variable rates that go up or down with the prime rate.
  • Down payment. Construction loans typically require a higher down payment than a standard mortgage loan. While you can put down as little as 3% on a home loan, construction loans may require a higher percentage.

Pro Tip: Qualifying for a construction loan is similar to qualifying for a standard mortgage loan, in that your credit score and debt-to-income (DTI) ratio should be in good standing.


The Benefits of Using a Construction Loan to Build a House

Building your own home might seem overwhelming at the beginning, but the end result is living in a space you dreamed up and made happen. Imagine that rewarding feeling you’d experience every day in your home! Here are some of the biggest benefits to building a house:

  • Customize your home from floor to ceiling. Building a new home allows you to get exactly what you want. From the layout of rooms to design elements like flooring, cabinets, lighting, fixtures, and everything else in between, you get to customize it all before you ever move in.
  • Lower maintenance costs on a brand-new home. New roof, new HVAC, new everything – you won’t have to sweat the thought of things breaking and dealing with maintenance costs any time soon.
  • Use the latest technology to future-proof your home. Newer homes are built with energy efficiency in mind. Unlike an older existing home, a newer home will have tightly sealed openings, higher efficiency HVAC systems, and energy efficient windows, doors and appliances.
  • Breathe easier in your new home. Unlike an existing home that may have been constructed using lead-based paints or asbestos, you won't have to worry about it with a new home.
  • Less competition in the market. Competition for existing homes in Arizona is extreme with our state being one of the hottest seller's markets in the United States. When you build your own home, you won’t have a line of people out front waiting for their showing.

Key Takeaways

  • Constructions loans can help you finance building a house, renovating, or making an addition to your home.
  • Construction loans differ from mortgage loans in terms of length and repayment but are similar in what you need to qualify.
  • Construction loans may require a higher down payment than traditional mortgage loans.
  • Building your own house allows you full customization and less maintenance issues.

Is a construction loan the right choice for you? Speak to OneAZ’s certified loan construction specialists to learn more about available ARM options for your construction loans.

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APR = Annual Percentage Rate

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