Loan Options When Building Your Dream Home

Building a Home Requires a Different Kind of Loan

Buying an existing home usually means getting a mortgage — simple enough. But when you’re building a custom home, the process is far more complex. Your dream home doesn’t exist yet, which means there’s no property to serve as collateral for a traditional mortgage.

That’s where construction financing comes in. Custom home construction loans are designed to cover the costs of labor, materials, permits, and land development while your home is being built. Once construction is complete, many of these loans can convert into a standard mortgage.

Building your home from the ground up can be exciting — but choosing the right loan is crucial. Let’s walk through the most common options available today.

Construction Loan vs Mortgage Loan

Feature	Construction Loan	Mortgage
Purpose	Build a home	Buy existing Home
Payments	Interest-only during build	Full monthly payments
Term	Short-term	Long-term
Funding	Paid in stages	Lump Sum

Standard Construction Loans: The Traditional Path

A construction loan is a short-term loan that provides funding in phases as your home is built. Unlike a regular mortgage, the lender doesn’t hand over the full amount upfront. Instead, funds are released as the project reaches specific milestones — for example, after the foundation, framing, or roofing is completed.

How Construction Loans in Central Iowa and Western Illinois Work

Because the lender is financing a project that does not yet exist, the vetting process is rigorous. Lenders in this category will not only check your financial health but also the viability of the project itself.

Vetting and Approval: Lenders will thoroughly evaluate both you and your builder. Expect credit checks, verification of income and debt-to-income ratio, and a review of your builder’s license, insurance, and past projects.
Detailed Plans: You’ll need to submit blueprints, construction timelines, and a full project budget before approval.
Draw Schedule: Funds are disbursed in “draws.” Each phase is inspected before the next draw is released, ensuring the project stays on track.

Tip: During construction, you typically make interest-only payments on the amount that has been drawn. Full principal payments begin once the home is complete.

Ask us about our Fidelity Bank Custom Home Loan program offering homeowners a special rate on your construction loan.

Two Main Types of Construction Loans

Most lenders offer one of two main types of construction loan structures, each designed to fit different needs and timelines. The primary difference between these loans lies in how the initial construction phase transitions into your long-term financing.

Understanding these two formats—One-Time Close and Two-Time Close—can help you choose the option that best matches your goals, budget, and comfort level with the building process.

One-Time Close (Construction-to-Permanent Loan)

A one-time close loan wraps your construction financing and your long-term mortgage into a single real estate transaction. Once the home is built, the loan "converts" to a permanent mortgage—typically a 15- or 30-year fixed—without a second trip to the closing table.

Benefit: Rate Certainty & Lower Costs. You lock in your long-term interest rate from the beginning, protecting you from rising market rates during the build. Since there is only one closing, you also save significantly on total closing costs and appraisal fees.
Drawback: Less Flexibility. Because the terms are set up front, it is much harder to change your loan amount or switch lenders if your needs change mid-construction.

Two-Time Close (currently offered by Fidelity Bank in Iowa and Illinois)

The two-time close method involves two entirely separate loans: a short-term loan to fund the build and a second "end loan" (the permanent mortgage) to pay off the construction debt once the home is finished.

Benefit: Shopping Power. You aren't committed to a permanent mortgage until the home is nearly done. This allows you to shop around for the best loan right before you move in.
Drawback: Double the Red Tape. You will pay two sets of closing costs and must go through the underwriting process twice. Most importantly, you must re-qualify for the second loan. If your credit score drops or interest rates spike significantly during the build, you may find it difficult to secure the final mortgage.

A standard construction loan is best suited for borrowers with strong credit, stable income, and a verified builder — those who can handle a larger down payment and detailed documentation.

Government-Backed Construction Loans: Expanding Accessibility

If a traditional construction loan feels out of reach, government-insured programs can make building a home more affordable. These loans are ideal for borrowers who have limited savings or credit challenges.

FHA Construction Loan

An Federal Housing Administration (FHA) construction loan can be either a one-time or two-time close loan, and generally works like those types of loans—with a few extra requirements. You can find more specifics on the FHA’s website.

Key Advantage: Lower credit score requirements and down payments (potentially as low as 3.5%).
Requirement: The property must meet FHA construction standards, and the borrower must use the home as their primary residence.
Caution: You’ll likely pay Private Mortgage Insurance (PMI), which adds cost until you build at least 20% equity.
Best For: First-time or moderate-income borrowers who need flexible credit terms.

VA Construction Loan

If you or your spouse is serving or has served in an eligible branch of the armed services, you may qualify for a VA Construction loan.

Key Advantage: Available to eligible service members, veterans, and some surviving spouses. The primary benefit is no down payment and no PMI.
Requirement: Must be your primary residence, and you’ll need a VA-approved builder and lender.
Best For: Qualified military members or veterans building a home for personal use.

USDA Single-Family Housing Guaranteed Loan Program

USDA loans are available to help eligible borrowers who might not be able to afford a standard down payment (5-20%). To qualify, you’ll need to meet certain credit and income levels, and individual lenders may have specific requirements in addition to those set by the USDA. You can learn more on their website.

Key Advantage: Offers 100% financing (no down payment) for low- to moderate-income borrowers in eligible rural areas.
Requirement: Geographic restrictions apply, and income must fall within program limits.
Best For: Rural homeowners who meet USDA income and location criteria.

Pro Tip: Government-backed programs can simplify the path to homeownership, but approvals often take longer and require more paperwork than private loans.

Compare Your Construction Loan Options

Choosing the right financing depends on your credit, down payment, and long-term goals. The table below summarizes how these loan types stack up:

Loan Type	Down Payment	Credit Requirement	Interest Rate	Term	Best For
Standard Construction Loan	10–20%	Good–Excellent	Market Rate	12–18 months	Strong credit, verified builder
FHA Construction Loan	3.5%	Moderate	Slightly above market	12–18 months	First-time or low-down-payment borrowers
VA Construction Loan	0%	Moderate	Competitive	12–18 months	Eligible veterans & service members
USDA Construction Loan	0%	Moderate	Competitive	12–18 months	Low- to moderate-income rural borrowers
Hard Money Loan	20–30%	Low	High	6–24 months	Investors, short-term projects

How to Choose the Right Loan for You

Not all loan types are suitable for all needs. Before committing, take the time to seriously consider your project, your needs, and your ability to repay. Here are some simple steps to get you started:

Evaluate your credit and savings. A higher credit score can qualify you for lower rates and fewer fees.
Define your timeline. Building a custom home can take 9–18 months. Choose a loan that fits your project’s pace.
Research your builder’s credentials. Lenders often require proof of experience, licensing, and insurance.
Compare lender options. Not all financial institutions offer construction financing — look for lenders experienced in this area.
Plan your exit strategy. Know whether your construction loan will convert to a mortgage or if you’ll need to refinance after completion.

Build on Your Lot Financing

Already own land in Central Iowa or Western Illinois? We can help you build on it.

Our build-on-your-lot financing options allow you to:

Use your land as equity
Customize your home design
Simplify the financing process

Contact Fidelity Bank today about build on your lot financing!

Custom Home FAQ's

How do construction loans work?

Construction loans fund your home in phases. You make interest-only payments during the build, and the loan converts into a mortgage when construction is complete.

What is the down payment for a construction loan

Most borrowers in Iowa and Illinois can expect a down payment of 10% and 20%, depending on credit and financial profile.

What is the difference between a construction loan and a mortgage?

A construction loan is used to build a home, while a mortgage loan is used to purchase or refinance an existing home.

Can I build on my own land?

Yes, Fidelity Bank offers build-on-your-lot financing for homeowners across Central Iowa and Western Illinois.

Where can I find a construction loan lender in Central Iowa and Western Illinois?

Working with a bank like Fidelity Bank gives you access to local expertise, faster decisions and personalized service.

Laying the Financial Foundation for Your New Home

Your dream home begins long before the foundation is poured — it starts with the right financing. Consider your choices carefully to find the best option for you.

With the right plan — and the right loan — you can turn your blueprint into reality.

Ask us about our Fidelity Bank Custom Home Loan program offering homeowners a special rate on your mortgage.

Want to learn more? Schedule a consultation with one of our many local mortgage loan officers.