Building a home gives you the opportunity to create a property around your lifestyle, but financing new construction is different from purchasing an existing home. Instead of receiving the full loan amount at closing, the money is generally released in stages as construction progresses.
If you are considering buying land or building a custom home in San Diego County, understanding the process before you make an offer can help you avoid costly surprises.
Prefer a quick visual overview? View my four-slide Instagram guide to construction loans, then continue reading below for a more detailed explanation.
A construction loan is short-term financing used to cover eligible costs associated with building a home. Depending on the lender and loan program, those costs may include the land, plans, permits, labor, materials and other approved construction expenses.
What Is a Construction Loan?
During construction, funds are typically released through a series of payments called draws. Before releasing each draw, the lender may require an inspection to confirm that the corresponding stage of work has been completed.
The Consumer Financial Protection Bureau recognizes two common structures:
- Construction-only loan: This finances the building phase. When construction is complete, the borrower generally needs a separate permanent mortgage to pay it off. That may mean qualifying again and paying another set of closing costs.
- Construction-to-permanent loan: This combines the construction financing and permanent mortgage. After the home is completed and the lender’s conditions are satisfied, the loan converts to a traditional mortgage. Depending on the program, this may reduce the need for a second closing.
The right option depends on your finances, timeline, project and the programs available through participating lenders.
What Do Lenders Typically Review?
Construction financing usually requires more documentation than a traditional mortgage because the lender is evaluating both the borrower and a home that has not been built yet.
Requirements vary, but lenders commonly review:
- Credit history, income, employment, assets and existing debts
- Funds available for the down payment, closing costs and financial reserves
- Ownership or purchase details for the homesite
- Architectural plans, specifications and construction contract
- A detailed budget and projected timeline
- The builder’s license, insurance, experience and financial qualifications
- An appraisal based on the proposed plans and the home’s estimated completed value
There is no single down-payment or credit-score requirement that applies to every construction loan. Standards vary by lender, loan type, occupancy, land equity and the overall risk of the project. This is why speaking with an experienced construction lender early is so important.
Steps to Getting a Construction Loan in 2026
1. Review your financial position
Before purchasing land or finalizing plans, review your credit, income, debts, available cash and monthly-payment comfort level. In addition to your down payment and closing costs, keep funds available for expenses that may fall outside the approved construction budget.
2. Speak with construction-loan lenders
Not every mortgage lender offers construction financing. Compare lenders that regularly handle these loans and ask about their available programs, builder approval process, draw schedule, rate structure, fees and conversion requirements.
If you may qualify for a VA-backed loan, ask specifically whether the lender offers VA construction financing. The Department of Veterans Affairs permits eligible borrowers to use VA-backed financing to build a home, but participating construction lenders can be harder to find and lender requirements still apply.
3. Evaluate the land before committing
A beautiful lot is not automatically buildable in the way you envision. Before removing contingencies, investigate zoning, legal access, utilities, water, sewer or septic requirements, grading, drainage, easements, environmental constraints and applicable development rules.
If you already own the land, its equity may be considered by some lenders as part of the financing structure. The treatment of land value and existing land debt varies, so confirm this directly with the lender.
4. Select an experienced builder
Most lenders will want to approve the contractor. Be prepared to provide information about the builder’s license, insurance, experience, references, financial condition and proposed contract.
Using a builder who understands lender draw procedures can help prevent delays. Owner-builder arrangements may be difficult to finance and are not accepted by every lender.
5. Finalize plans, specifications and budget
The lender needs enough detail to evaluate what is being built and how much it should cost. Your submission may include architectural drawings, engineering documents, material specifications, permits or permit status, a signed construction contract, cost breakdown and project schedule.
Selections and allowances should be realistic. Upgrades, change orders and underestimated site work can quickly increase the final cost.
6. Complete the appraisal and underwriting
Because the house does not yet exist, the appraiser generally evaluates the plans, specifications, land and comparable properties to estimate the home’s value when completed. The lender then considers the appraised value, construction cost and borrower qualifications when determining the loan.
If the projected cost is higher than the supported value, the borrower may need to contribute additional funds or revise the project.
7. Close and begin the draw process
After closing and satisfaction of the lender’s conditions, construction funds are typically held and released according to an approved draw schedule. Inspections may be required before payments are issued.
During the construction phase, some loans require payments based only on the amount already disbursed, while other terms may apply depending on the program. Review your Loan Estimate, Closing Disclosure and loan documents carefully so you understand the interest rate, payments, fees and what happens if construction is delayed.
San Diego Considerations
Building in San Diego County can involve additional planning because requirements vary by location. The County of San Diego’s Planning & Development Services handles residential permits in unincorporated areas, while incorporated cities—including the City of San Diego—have their own planning and building departments.
Depending on the property, buyers may also need to evaluate grading, coastal restrictions, wildfire requirements, biological resources, septic feasibility, utility connections and access. Permit timing and site work can materially affect both the construction schedule and budget.
Before purchasing land, assemble the right team. That may include a real estate professional, construction lender, licensed contractor, architect, engineer, land-use consultant and appropriate inspectors.
Common Mistakes to Avoid
- Buying land before confirming that the proposed home is feasible
- Assuming every lender offers construction financing
- Choosing a contractor before understanding the lender’s approval requirements
- Underestimating grading, utility, permit and site-preparation costs
- Making major upgrades after the loan and appraisal are approved
- Using the entire available budget without a contingency reserve
- Failing to understand how delays could affect the loan term or conversion
Start With the Property and a Realistic Plan
A construction loan can make a custom home possible, but success begins long before construction starts. The land, plans, builder, budget, appraisal and financing must work together.
If you are thinking about buying land or building a home in San Diego County, I can help you evaluate potential properties, identify important due-diligence questions and coordinate with the professionals involved in the process.
Let’s connect and discuss the first steps toward your plans.
Raana Jamshide, REALTOR®
DRE#01255312
Pacific Sotheby’s International Realty
Loan programs and requirements vary by lender. This information is general, so consult qualified lending, legal and construction professionals about your specific project.
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