If you plan to build, you will need to understand construction loans in California, which work very differently from a regular mortgage. Here are the requirements, costs and structures to know before you break ground.
How a construction loan works
Instead of one lump sum, funds are released in stages (draws) as work is completed and inspected. During construction you typically pay interest only on the amount drawn. After the home is finished, the loan is paid off or converted to a regular mortgage.
One-time close vs. two-time close
- Construction-to-permanent (one-time close): one application and closing, and the loan converts to a standard mortgage after construction. You can often lock the long-term rate up front.
- Two-time close: a construction loan first, then a separate mortgage after the build. This gives flexibility but means a second approval and closing costs.
Typical requirements
- Down payment: often 20% to 25% of the project cost, sometimes less. Land you own can count toward it.
- Credit and income: stricter than for a standard purchase, since the loan funds something not yet built.
- Licensed, insured builder: lenders review the general contractor’s experience and finances.
- Plans, permits and budget: a detailed cost breakdown, approved plans and an appraisal of the finished value.
- Reserves: a contingency for overruns and carrying costs.
Costs to plan for
Beyond construction itself, budget for permits and impact fees, utility connections, architect and engineering fees, interest during construction, loan fees, insurance and a contingency. In Los Angeles, permitting and utilities can take longer and cost more than owners expect.
The draw process
- You close the loan and break ground.
- The builder requests a draw at each milestone.
- The lender sends an inspector to verify the work.
- Funds are released and interest accrues on the drawn amount.
Tips
- Get multiple bids and a fixed-price or clearly defined contract when possible.
- Pad your budget and timeline.
- Talk to a lender before you finalize plans so the project meets their guidelines.
- Planning an ADU? Read our guide to ADU financing too.
Frequently asked questions
How much is the down payment on a construction loan in California?
It is often 20% to 25%, though programs vary. Land you own may count.
Can I act as my own builder?
Most lenders require a licensed general contractor, and owner-builder loans are rare and more restrictive.
What happens when construction is finished?
A construction-to-permanent loan converts to a mortgage. With a two-time close you refinance into a new mortgage.
Planning to build? Our lending team can walk you through construction loan structures.
This article is general information, not a loan commitment, legal or tax advice. Programs, rates and rules change, so confirm current details with a licensed professional before you decide.
Written by the Terranova Real Estate Group team · DRE 01785581 · NMLS 1091484 · Meet Griselda Espinoza