What Is a Construction Loan and How Does It Work in Texas?
Building a home or commercial space from the ground up is an exciting milestone. However, these projects come with unique financial considerations, beginning with how financing is secured.
Construction loans work differently from traditional mortgages. This is why understanding how they work is important before you begin your project, especially if you want to build your dream home or launch a new business location in Texas.
In this guide, we'll walk you through what a construction loan is, how it works in Texas, and what you can expect throughout the process from application to construction.
Questions about getting a loan? Call 940-665-1711 or visit your local First State Bank branch.
What Is a Construction Loan?
A construction loan is a short-term, specialized loan used to cover the cost of building a new residential or commercial property. Instead of receiving a lump sum like a traditional mortgage, the funds are disbursed in phases as construction progresses. This allows you to pay for materials, labor, permits, and inspections as they're needed.
Construction loans typically last 12 to 18 months and are considered high-risk by lenders. That's why they usually require detailed building plans, a licensed contractor, and a larger down payment. Most loans are structured as interest-only during construction, with the full balance due at project completion unless it's rolled into a long-term mortgage.
Whether you're planning a custom home or an investment property, understanding the basics of a home construction loan can help you prepare financially and avoid costly delays. At First State Bank, we offer personalized solutions for construction loans in Texas tailored to your goals and timeline.
How Does a Construction Loan Work in Texas?
When you apply for a construction loan in Texas, the lender will evaluate your budget, plans, and contractor before issuing approval. Once approved, the funds are disbursed gradually through a draw schedule, which is a process designed to align with key phases of your build, such as laying the foundation, framing, or installing systems.
After completing a milestone, the lender sends an inspector to verify the progress. Once that inspection is approved, the next draw is released. Throughout the construction phase, you'll typically make interest-only payments on the disbursed amount, not the full loan.
Construction loans are short-term and can feel complex, but the process is smooth and transparent with the right lender. Choosing a Texas-based bank like First State Bank means you get local decision-making, direct communication, and experienced guidance from start to finish.
Types of Construction Loans Available in Texas
There's more than one way to finance a building project. Choosing the right construction loan depends on your goals, timeline, and how you plan to repay the loan after construction ends.
Here are the most common types available in Texas:
- Construction-to-Permanent Loan: This loan combines your construction financing and long-term mortgage into one. Once your home is finished, the loan automatically converts to a standard mortgage, saving you from two closings.
- Stand-Alone Construction Loan: This short-term loan covers only the building phase. After construction, you must apply for a second loan (typically a mortgage) to pay it off.
- Owner-Builder Loan: This type of loan may be available if you're a licensed builder or contractor planning to oversee the project yourself. It's less common and carries added risk.
At First State Bank, we offer residential construction loans in Texas with flexible options designed to fit your project's needs, whether you're building in Gainesville, Decatur, or anywhere in North or Central Texas. If you're still securing property, our land and lot loans can help you purchase the right location before construction begins.
Eligibility Requirements for Construction Loans in Texas
Getting approved for a construction loan involves more documentation and preparation than a traditional mortgage. Since you're borrowing money for a project that's currently non-existent, lenders need assurance that your build is feasible and your finances are solid.
Here's what you'll typically need to qualify:
- Good Credit History: Most lenders look for a credit score of 680 or higher
- Low Debt-to-Income (DTI) Ratio: This shows you can manage payments during construction.
- Detailed Construction Plans: Including blueprints, budgets, and a proposed timeline.
- Licensed Builder: Lenders often require you to work with a vetted, experienced contractor.
- Larger Down Payment: Often 20% or more since construction loans carry more risk.
Lenders may also review your land ownership status, permits, and insurance plans before issuing final approval. At First State Bank, we understand the regulations, zoning, and challenges unique to construction loans in Texas, and we're here to guide you at every step.
How To Apply for a Construction Loan
Though construction financing may appear complex, following a structured approach makes it easier to navigate each phase of the process:
- Schedule a Consultation: Meet with a loan officer at your local First State Bank branch to discuss your project and financing needs.
- Gather Your Documents: You'll need detailed construction plans, a project budget, contractor information, building permits, and proof of land ownership (or a land purchase agreement).
- Get Pre-Qualified or Pre-Approved: This will help you understand how much you can borrow and what loan terms may apply.
- Submit a Full Loan Application: Include your financial information, credit history, and construction-related documents.
- Underwriting and Appraisal: Your project will be reviewed for feasibility, and the property will be appraised based on future value.
- Close on Your Loan: Once approved, you'll sign documents, and construction can begin.
- Draws and Inspections: As each stage of your build is completed, funds are released after inspections.
- Loan Conversion: If you've chosen a construction-to-permanent loan, your financing will automatically convert into a standard mortgage.
Frequently Asked Questions About Home Construction Loans
As you explore your construction financing options, understanding the details can help you make informed decisions. Here are answers to the most common questions we hear from First State Bank clients exploring home construction loans in Texas:
Can I use a construction loan for renovations?
Most construction loans are designed for new builds. However, some renovation or construction-to-permanent loans may allow major remodels. Ask your loan officer for options that fit your project.
How long does the construction loan process take in Texas?
The process usually takes 30 to 60 days from application to final approval. The full build timeline depends on your contractor, permits, and weather conditions.
What happens if the project goes over budget?
You may need to cover additional costs out of pocket or request a loan modification - both subject to approval.
Can I use land I already own as a down payment?
Yes. In many cases, land equity can be used to meet part or all of your down payment requirements. Depending on your situation, a home equity loan might also be an option to help fund part of the build.
Why Choose a Local Texas Bank for Your Construction Loan?
When it comes to building in Texas, local knowledge matters. A Texas-based lender like First State Bank understands regional construction challenges, city permitting processes, and land development timelines that national lenders may overlook.
Choosing a local partner means faster communication, personal service, and decisions made close to home. We know the communities we serve, and we're invest in helping them grow.
Contact First State Bank online or call 940-665-1711 to start the conversation.
*All loans are subject to credit approval. Terms and conditions apply. Contact First State Bank for more information.