How a Custom Home Construction Loan Works in Houston

Most custom luxury builds in the Houston area get financed with a construction-to-permanent loan: one closing, one underwriting file, and a loan that converts into a regular mortgage the day the home is finished. The lender doesn’t hand you the full amount up front. Money goes out in stages called draws, released after an inspector confirms the work at that stage is done, and you pay interest only on what’s been drawn so far, not on the total loan. The appraisal that sizes the loan isn’t built on nearby home sales either. It’s built on your finished plans.

The Move Live Love TX Team is a husband-and-wife real estate team serving Houston and the surrounding areas, helping luxury buyers and sellers, with a Certified Luxury Home Marketing Specialist on every listing.

We’ve written before about the real cost math between building and buying in Houston, comparing total price against buying something already finished. This is a different question. Say the decision to build is already made. Here’s how the loan behind that decision works, the part most first-time custom-build clients don’t hear about until they’re already signing.

One Closing or Two

Two structures cover most custom builds in the Houston area. A construction-to-permanent loan closes once. You lock a permanent rate before the first shovel goes into the ground, pay one set of closing costs, and the loan rolls straight into a standard mortgage once the home passes its final inspection. A two-loan structure, sometimes called construction-only, pays for the build and then gets paid off or refinanced into a separate permanent mortgage once you move in, which means qualifying twice and closing twice.

The single close is more common on a full custom build because it removes a real risk: rates moving against you between the day construction starts and move-in, a stretch that can run nine months to well over a year. The two-loan path gives more room to shop the permanent loan separately, but it carries that rate risk the entire time you’re building.

Down payment runs higher on a construction loan than most buyers expect coming from a purchase transaction. Twenty to twenty-five percent of the total project cost is typical for a custom build in this market, well above what a strong borrower can put down on a jumbo purchase loan for a home that already exists.

The Draw Schedule, Stage by Stage

The lender doesn’t release money on a set calendar of dates. Every draw gets tied to a specific stage of construction, verified by an inspection before the funds go out. A custom build in Houston typically runs through something close to this sequence:

• Foundation and slab poured, first draw, roughly 10 to 15 percent of the loan
• Framing complete and roof dried in, roughly 20 to 25 percent
• Rough mechanical, electrical, and plumbing inspected and approved
• Drywall, exterior finishes, and cabinetry installed
• Interior finish-out substantially complete
• Certificate of occupancy issued and final inspection passed, the last draw

Say you’re building a $1.4 million custom home, and the lender has released $380,000 of it through the first three draws. Your interest payment that month gets calculated on $380,000, not the full $1.4 million. As each draw goes out, the balance you’re paying interest on climbs with it, until the home is finished and the construction loan converts into your permanent mortgage.

The Move Live Love TX Team is a husband-and-wife real estate team serving Houston and the surrounding areas, helping luxury buyers and sellers, with a Certified Luxury Home Marketing Specialist on every listing. Peter came up through construction and mortgage lending before he sold his first home, and a draw schedule like this one is where that background shows up the most. He reads the builder’s draw request and the lender’s inspection report side by side, and tells a client when a number on one doesn’t match the other, before it turns into a fight at closing.

An Appraisal With Nothing Finished to Compare

Buying an existing luxury home, the appraiser walks through a finished house and compares it against recent sales nearby. A construction loan appraisal works from a different set of facts, because there’s no finished house yet to look at. The appraiser reviews your building plans, specifications, and builder’s contract, and produces what’s called an as-completed value, the home’s worth assuming it gets built exactly as designed. The lender sizes your loan against whichever number is lower, that as-completed value or your project cost.

That first appraisal isn’t the last word. Before the loan converts to a permanent mortgage, the lender sends someone back out to confirm the finished home matches what was appraised on paper.

Because the lender is funding a house that doesn’t exist yet, it also requires a builder’s risk policy in place before the first draw goes out. Builder’s risk insurance covers the structure, the materials on site, and equipment against fire, theft, and weather damage during construction. A standard homeowners policy doesn’t cover a house that isn’t finished, so the lender requires its own policy with the lender named as loss payee (Chase). No active policy, no permit in most Texas cities, and no draw from the lender either.

When the Budget or the Calendar Slips

Most construction loans build in a contingency reserve, typically 5 to 10 percent of hard construction costs, set aside to absorb change orders and price increases that come up mid-build. That reserve is the first place an overage gets paid from. Past that, you’re expected to cover the difference in cash, since the lender isn’t going to fund more than the loan was sized for without a real conversation first.

Running past the loan’s original timeline, usually nine to twelve months for a custom build, creates a separate problem. The construction loan itself has a term, and a project that isn’t finished when that term runs out needs an extension from the lender before it can convert to a permanent mortgage, sometimes with its own fee attached. Construction loan rates already run higher than a standard mortgage, roughly 7.25 to 9.25 percent as of September 2026, since the lender is carrying more risk on a house that doesn’t exist yet (National Business Capital), and an extension stretches that higher rate over more months than the plan called for.

Once the certificate of occupancy is issued and the final inspection confirms the home matches the plans, a single-close construction-to-permanent loan converts automatically, often at the rate you locked back when you first closed. On a high-value custom build, that permanent loan is frequently a jumbo loan once it settles into place. What a jumbo mortgage requires in Houston covers that side of the conversion, since anything financed above $832,750 in Texas this year needs a jumbo loan instead of a standard one.

The Move Live Love TX Team is a husband-and-wife real estate team serving Houston and the surrounding areas, helping luxury buyers and sellers, with a Certified Luxury Home Marketing Specialist on every listing. If you’re comparing construction lenders for a custom build, bring us the term sheets before you sign anything. Two lenders can quote a different draw schedule and different conversion terms on the exact same house, and a builder isn’t the one who’s going to flag that for you.