My real estate work has included heavy renovations and construction. That is why I want the financing discussion to start while the plans and contract can still be changed. Discovering a funding gap after work begins leaves you with fewer choices.
Start with how the project is being purchased
If you own the lot and hire a builder, you may need construction financing that pays approved costs during the build. If the builder owns the property and carries construction, you may instead be qualifying for a purchase mortgage on the completed home. Those are different arrangements even when both involve a custom house.
Also separate building a home to occupy from building for sale or rent. Occupancy and exit change the lender's program. The contractor's construction line, a consumer construction to permanent loan and an investor project loan should not be treated as interchangeable.
Fannie Mae's residential guidance recognizes construction to permanent structures with one closing or two, with permanent financing replacing the interim construction phase. [1] The specific lender still sets its available products and project review requirements.
The financing timeline
| Stage | ** What should be resolved** | ** Money question** |
|---|---|---|
| Before final contract and major deposits | Borrower fit, land, builder and preliminary budget | How much cash can the borrower commit and retain? |
| Before closing | Accepted plans, contract, appraisal, permits and title requirements | What funds at closing and what remains in the draw budget? |
| During construction | Approved work, inspections, draw evidence and change control | Who pays expenses before a reimbursement arrives? |
| At completion | Completion evidence, required approvals and lien resolution | What must be paid or documented for final funding? |
| Permanent phase or sale | Conversion or new loan requirements and final costs | What pays off the construction balance? |
Use the one time versus two time close comparison for the detailed choice between those residential structures.
Land equity and existing liens
Give the lender the deed, acquisition history, current loan information and any known restrictions. Owning land can contribute equity, but its accepted value and treatment depend on the program. The price you paid or a property's tax assessment does not establish the lender's equity credit.
An existing land loan may need to be paid off or otherwise addressed in the approved lien structure. Include the payoff in sources and uses. Do not count the same land value as both cash available to pay the builder and equity already invested in the project.
Before buying a lot, investigate access, legal buildability, utilities, site preparation and relevant restrictions. A low lot price can be outweighed by work needed before the foundation. The land and construction decisions should be reviewed together.
Build a complete budget
The builder's house price is one part of the project. Account for land, clearing, fill, drainage, utility connections, design, engineering, permits, construction, lender and title costs, insurance, contingency and carrying costs as applicable.
Identify allowances and exclusions. An allowance that is too low for the selected finish creates an owner cost even when the base contract is fixed. A fixed price contract also needs a clear scope and process for owner changes or other permitted adjustments.
Separate approved loan funded costs from cash paid outside the loan. Then match timing with the builder's payment schedule. A cost can be eligible for eventual reimbursement while still requiring money from you before the draw is released.
Keep money for your household outside the project budget. Continuing rent, the current mortgage, storage or temporary accommodation can matter if completion is delayed.
How an appraiser values a home before it exists
The appraisal uses information describing the proposed completed property, including plans and specifications or other permitted evidence sufficient to identify its quality and character. Fannie Mae's completion guidance specifically addresses proposed construction and later verification. [2]
Provide a consistent package: site information, floor plans, room count, living area, materials, quality, major features and the builder's contract. Include site improvements that form part of the finished real estate. If an important feature changes, tell the lender before assuming the original appraisal still fits.
Comparable sales and the market's reaction to the proposed home matter. The appraisal is not a promise to reimburse every construction dollar. Expensive customization, difficult site work or an unusually large home for its setting can cost more than the market recognizes in value.
Construction cost and completed value can diverge
A builder prices labor, materials, overhead, risk and profit for your project. An appraiser estimates value under the assignment and market evidence. They are answering different questions.
Consider a custom finish with a substantial cost that few nearby buyers are willing to pay for. Reducing that finish might lower the cash budget more than the value conclusion. Conversely, removing useful living area could reduce cost and value together, leaving less financing benefit than expected.
Ask the builder, lender and appraiser through the appropriate process what a revised scope would require. Do not change approved plans solely on an assumption that every dollar saved will fix the loan gap.
For detailed valuation troubleshooting, read the construction appraisal guide. Here, the key precontract decision is how much cash you can supply if cost and accepted value do not match.
A construction cash requirement example
Assume a hypothetical project includes land valued and accepted at $150,000, construction of $500,000 and $50,000 of other accepted project costs. Total cost is $700,000. The lot has an existing $50,000 lien, leaving $100,000 of net land equity for this example.
Suppose the lender applies an illustrative 80% cost limit and 80% completed value limit. If accepted completed value is $750,000, the cost test permits $560,000 and the value test $600,000. The lower modeled loan is $560,000.
| Funding item | ** Illustrative amount** |
|---|---|
| Total accepted project cost | $700,000 |
| Loan under the lower test | $560,000 |
| Net accepted land equity | $100,000 |
| Additional project cash | $40,000 |
Part of the loan must address the land lien; the whole commitment is not available for new construction. Costs excluded by the lender and required liquidity are additional. These percentages and the land treatment are assumptions, not universal construction loan rules.
If completed value is only $650,000, the assumed value limit becomes $520,000. Additional project cash rises from $40,000 to $80,000 with everything else unchanged. Review that downside before committing a nonrefundable deposit that leaves you unable to fund the difference.
What a low appraisal can change
First check whether the report describes the approved home accurately and uses the information supplied. If there is a factual error or relevant market evidence, use the lender's reconsideration process. A reconsideration should present support, not a request to match the builder's price.
Other realistic responses include more equity, a revised contract, a different scope or reconsidering the project. Any revision can require a new budget, appraisal review and lender approval. Lowering cost alone may not solve the problem if accepted value falls too.
Before paying significant deposits, clarify appraisal timing, what is refundable under the contract and which financing or appraisal conditions protect your decision. Your attorney or other contract adviser should explain the actual rights and deadlines.
Builder approval and draw control
Verify the builder and relevant license information. Florida DBPR explains how to check the contractor and the business they qualify. [3] State licensure and lender builder approval are different reviews; satisfying one does not establish the other.
Ask how inspections, draw requests, lien releases, title updates and retainage work. Confirm whether the builder can operate within the lender's payment process. An inspection used for funding is not a broad guarantee of workmanship or a replacement for your own appropriate inspections.
Interest during construction may depend on the amount actually advanced. Ask for the rate, payment calculation, reserve treatment and the amount due as funding grows. Also establish completion deadlines, extension conditions and the cost of a delay.
Common problems and workable responses
| Problem | ** First response** | ** Funding implication** |
|---|---|---|
| Budget omits site work | Obtain a complete bid and revised sources and uses | Additional cash or a revised approved scope |
| Appraisal is lower than needed | Check facts and available reconsideration evidence | More equity or an approved project change |
| Builder needs money before a draw | Reconcile contract and lender disbursement rules | Temporary cash may be required |
| Change order increases cost | Price and approve it before work | Commitment may not increase |
| Completion is delayed | Review the deadline and extension terms early | Added interest and household carrying costs |
| Final funding is held up | Identify missing completion, title or other evidence | Cash may remain unavailable until the condition is resolved |
Preclosing documents and budget checks
Borrower income, credit, asset and permanent payment qualification documents requested for the program.
Land deed, acquisition history, liens, survey and known restrictions.
Plans, specifications, site work detail and the signed construction contract.
Builder information, licensing, insurance and lender approval items.
Detailed budget, allowances, contingency, draw schedule and change order procedure.
Appraisal, permits or permit status, title requirements and required insurance.
Construction payment and carry schedule, completion deadline and extension conditions.
Permanent conversion or second closing requirements, remaining cash and the downside appraisal calculation.
Fannie Mae's construction to permanent overview addresses completed and paid work, lien matters and completion or occupancy evidence before delivery under its requirements. [1] Confirm your lender's actual closing, draw and conversion conditions rather than treating the broad sequence as a universal checklist.
Construction loan questions
Can I change finishes after the appraisal
Ask before changing the approved scope. The lender may need updated plans, costs or valuation evidence. Paying for the change personally does not automatically remove the need for approval.
Is renovation financing the same as a construction loan
Different programs cover different work. For an existing home you will occupy, compare the FHA 203k renovation guide and, where relevant, VA renovation options. They should not be assumed to fund a new build under identical rules.
What if I plan to keep a renovated investment property
Review the hard money to DSCR exit guide before acquisition. Buildability, repairs and the final rental loan each need a workable path.
Map the cash before the builder deposit
Bring the lot details, plans or concept, builder bid, intended use, schedule and cash available. I would start by separating approved project costs from cash you must supply, then test appraisal and delay risk before you commit to the builder's payment timetable.
Sources
- Fannie Mae B5 3.1 01 Construction to Permanent Overview, transaction structures, completion and lien requirements. Reviewed October 17, 2026.
- Fannie Mae B4 1.2 05 Completion and Postponed Improvements, proposed construction description and verification requirements, including the applicable reporting framework. Reviewed October 17, 2026.
- Florida DBPR Construction Business Information, contractor and qualifying business verification. Reviewed October 17, 2026. Project examples illustrate planning and do not establish a lender's land equity or leverage policy.