Construction Loan Financing

Building your dream home is exciting—but financing it is different from buying an existing home. At Smithsonian Homes, we want you to understand exactly how a construction loan works in Texas, so you can be prepared and confident throughout the process.

What is a Construction Loan?

A construction loan is short-term financing that covers the cost of building your home from the ground up. Unlike a traditional mortgage, funds are released in stages (called “draws”) as construction progresses. Once your home is finished, the loan typically converts into a permanent mortgage.

Key Steps in the Process

Step 1 – Pre-Qualification

You’ll meet with a lender to review your credit, income, assets, debts, and overall financial profile. Most lenders require:
● A credit score of at least 620–680 (higher scores may qualify for better terms)
● Stable income and proof of employment
● A manageable debt-to-income ratio (often under 45%)
● Cash reserves for down payment and closing costs

Step 2 – Select a Builder and Finalize Plans

In Texas, lenders require detailed building plans and specifications before approval.
Smithsonian Homes will provide:
● Blueprints & architectural drawings
● A line-item budget and cost breakdown
● A construction timeline

Step 3 – Loan Application & Approval

The lender will order an appraisal based on the plans, budget, and expected value of the completed home. You’ll also need to provide:
● Proof of land ownership (or purchase contract)
● Builder’s license and insurance details
● Signed construction contract

Step 4 – Closing the Loan

Once approved, you’ll close on the construction loan, just like a mortgage. At closing, you may need to pay interest reserves, prepaid costs, and lender fees.

Step 5 – Construction & Draws

Funds are released in phases as certain milestones are completed (foundation, framing, roofing, finishes, etc.). An inspector verifies each stage before the lender releases payment.

Step 6 – Loan Conversion

When your home is finished, the construction loan will either:
● Convert to a permanent mortgage (Construction-to-Permanent Loan), or
● Be paid off with a new mortgage you arrange separately

What You’ll Need to Qualify

Most Texas lenders will ask for:
● Minimum 20% down payment (some allow less with strong credit or special programs)
● Credit score meeting lender guidelines
● Proof of income and tax returns (usually 2 years)
● Acceptable debt-to-income ratio
● Detailed construction documents and builder agreement

Tips for a Smooth Process

Choose a builder experienced with Texas construction loans
● Keep financial documents up-to-date and ready to submit
● Understand the draw schedule and inspection process
● Budget for contingencies—unexpected costs can arise
● Stay in close contact with your lender and builder throughout the build

At Smithsonian Homes, we guide you through every step—from connecting you with trusted
lenders to ensuring your project stays on track. Building a home should be exciting, not
overwhelming, and we’re here to make the process seamless.