Building a home in Texas: one-time close or two-time close construction loan?

Two ways to finance a house that is not built yet

A construction loan pays your builder in stages as the house goes up, and you typically pay interest only on the money released so far. When construction ends, the debt becomes a regular mortgage. A one-time close does all of that under a single loan and a single closing at the start. A two-time close uses a short-term construction loan first and a separate permanent mortgage, with its own closing, once the house is finished. One closing means less paperwork and one set of closing costs; two closings can mean more flexibility at the end, at the cost of qualifying and paying closing costs twice.

My team offers both structures, and I have helped buyers choose between them for many years. Neither is right for everyone. Here is how each works and the questions that decide which one fits your build.

How a construction loan pays for the work

Unlike a purchase mortgage, a construction loan does not hand over the full amount at closing. Funds are released in stages called draws, tied to the progress of the build. TD Bank's explanation of construction-to-permanent loans describes draws paid directly to the builder, with the borrower paying interest only on the amount withdrawn so far while construction continues.

That structure protects everyone. The builder is paid for work completed, the lender's money goes into a house that actually exists, and you are not paying interest on funds the builder has not used yet. It also means your payment during construction usually starts small and grows as more of the loan is drawn. Plan your budget for the full amount by the end of the build, not for the first month's payment.

Ask early who pays for what during construction. Builder deposits, permit fees, utility connections, the builder's risk insurance policy and items like landscaping or fencing may or may not be in the construction budget. Anything outside the budget is usually paid in cash, so a clear list before closing prevents uncomfortable surprises halfway through the build.

• Closing: the loan is signed, but most of the money is not yet released
• Draws: funds are released as stages of the build are completed
• Inspections: progress is typically verified before each draw
• Interest-only period: you pay interest on what has been drawn
• Completion: the house is finished and the loan moves to permanent payments

The one-time close, step by step

With a one-time close, also called construction-to-permanent, you apply once, qualify once and close once, before construction begins. The same loan covers the build and then becomes your long-term mortgage when the house is finished. TD Bank's guide puts the main advantage simply: only one closing, at the beginning of the project.

The appeal is certainty and simplicity. You do not have to requalify after a year of building, which matters if your income, job or credit might change during that time. You pay one set of closing costs. And you know at the start how the permanent loan is structured, so the end of the build is a conversion, not a new application.

The trade-off is that you commit early. Depending on the program, the permanent terms are set at the start, so if rates fall during construction you may not benefit without refinancing later. Programs also vary in their requirements for credit, equity and builder approval, so ask your lender exactly what applies.

The two-time close, step by step

A two-time close splits the financing into two separate loans. The first is a short-term construction loan that pays the builder through draws. When construction is complete, you take out a permanent mortgage to pay off the construction loan, with a second application, a second approval and a second closing.

The advantage is flexibility. You can choose the permanent loan at the end, based on the rates and programs available then, and you may even choose a different lender for the permanent mortgage. For buyers who expect their finances to look stronger at completion, or who want to shop the long-term loan when the house is done, that can be worth it.

The cost is that you go through qualification twice and pay two sets of closing costs. If your income drops, your credit changes or you take on new debt during the build, the second approval is not guaranteed. I have seen buyers with a finished house and a delayed permanent loan because they financed a car during construction. If you choose two closings, treat the build period like an extended loan process and keep your finances steady.

There is also a timing risk. If construction runs long, a short-term construction loan may approach its maturity before the house is finished, and extending it can carry a cost. Ask what happens if the build is delayed, and read the builder's contract for its own schedule commitments.

Choosing between them: the questions that decide

When a buyer sits down with me to pick a structure, these are the questions we go through. Your honest answers usually point clearly to one option.

• How confident are you that your income and job will stay the same through the build?
• Would you rather lock in certainty now or keep the option to shop the permanent loan later?
• How much do two sets of closing costs matter to your budget?
• How long is the build expected to take, and how firm is the builder's schedule?
• Do you already own the lot, and is there equity in it?
• Is your builder approved by the lender, and do they have experience with draw schedules?

Your builder matters as much as your loan

A construction loan is a three-way relationship between you, your lender and your builder. Lenders typically review the builder, the plans, the budget and the construction contract before closing, and the draw schedule depends on the builder submitting requests and passing inspections on time. A builder who has never worked with draws can slow everything down.

Get the budget right before you close. Changes during construction, upgrades, change orders and price increases all affect how much money the loan has to cover. If the scope grows beyond the approved budget, you may need to cover the difference in cash. Comparing bids carefully helps here; a remodeling contractor has written a useful guide on comparing three bids that do not match, and the same discipline applies to new construction.

If you are buying from a builder who has a preferred lender, compare that offer too. Builder incentives can be valuable. But when a buyer falls outside the builder lender's in-house guidelines, my team can often help with less stringent guidelines and credit guidance, and we regularly work with builders on exactly those files.

Texas weather is part of the plan as well. Heavy spring rain, summer heat and the occasional winter freeze can all push a Dallas build schedule back by days or weeks. A realistic timeline with some slack protects your rate lock, your draw schedule and your moving plans.

Renovating instead of building

Some people who think they need a construction loan actually need renovation financing. If you are buying a house that needs work, or you want to remodel the one you own, a renovation loan may fit better than building from the ground up. My team offers Fannie Mae's HomeStyle Renovation loan, which combines the purchase or refinance with the cost of the renovation in one loan and one payment.

HomeStyle Renovation can fund anything from small repairs to major refurbishment, you choose your own contractor, and it can be used for a primary residence, a second home or an investment property. As with construction loans, the contractor, the budget and the scope of work are reviewed before closing, so plan the project in detail first.

Mistakes that make a build harder to finance

Most construction financing problems are avoidable. They come from treating the build like a simple purchase or assuming the loan will stretch to cover whatever happens along the way.

• Signing with a builder before talking to a lender about the loan structure
• Underestimating upgrades and change orders, leaving the budget short
• Financing furniture or a car during the build, which can affect the permanent loan
• Choosing a builder with no experience working with draw schedules
• Forgetting to budget for the growing interest payments as more is drawn
• Not reading the construction contract's schedule and delay terms

Starting a construction loan with my team

When you call my team at First United Bank, we start with your plans: the lot, the builder, the budget and the timeline. We explain both structures with your numbers, then pre-underwrite the file so you know where you stand before you sign a construction contract. Before you commit, the questions in what to ask a mortgage lender before applying apply just as much to construction. If you want to understand what drives the pricing of the permanent loan, read what sets your mortgage rate and closing costs.

Once construction is underway, we stay involved: tracking draw requests, keeping you and your builder informed, and preparing the conversion or the permanent loan well before completion so there is no gap at the end. The timeline from contract to closing on the permanent side follows the same principles I describe in how long a mortgage takes to close.

We work with buyers building in Dallas–Fort Worth and across Texas. Construction programs have specific requirements for credit, equity, builders and budgets, and they change over time. Nothing here is a rate quote or an approval promise, and a licensed loan officer should walk you through the options for your build.

Questions people ask me