Construction Loan Basics for Building a Custom Home in Utah

Financing a custom home does not work like financing a resale home. You are not borrowing against a house that exists, you are borrowing to create one. That changes the loan structure, the timeline, and what the lender wants from you. Here is how construction financing actually works in Utah so you walk into the conversation prepared.

The Two Common Structures

There are two main paths. A construction-to-permanent loan (sometimes called a one-time-close) funds the build and then converts to a standard mortgage when the home is finished, with a single closing and one set of closing costs. A stand-alone construction loan funds only the build and is refinanced into a separate mortgage at completion, which means two closings and two sets of costs. For most owners building a primary or second home, the construction-to-permanent loan is simpler and cheaper. Ask any lender to quote both.

How Draws Work

During construction you do not get the loan as a lump sum. The lender releases money in stages, called draws, tied to completed milestones: foundation, framing, dry-in, mechanicals, finishes, completion. Before each draw the lender typically sends an inspector to confirm the work is done. You pay interest only on the money drawn so far, not the full loan amount, so your carrying cost climbs gradually as the home rises rather than hitting all at once.

What Lenders Want to See

Construction lenders underwrite both you and the project. Expect them to ask for the signed construction contract, a detailed line-item budget, the plans, the builder's license and insurance, a realistic build timeline, and an appraisal based on the plans and finishes (an as-completed value). They will look at your income, credit, and how much cash you are bringing in. The more complete and credible the builder's budget, the smoother underwriting goes, which is one practical reason a real line-item estimate beats a single dollar-per-foot number.

Down Payment and Reserves

Construction loans usually require more equity than a resale purchase, commonly 20 to 25 percent of the total project cost, and lenders like to see cash reserves on top of that. If you already own the land outright, its value often counts toward your equity, which can sharply reduce the cash you need at closing. Owning the lot free and clear is one of the strongest positions you can be in when you apply.

Interest Rates and the Rate-Lock Question

Construction loan rates typically run a bit above standard mortgage rates because the lender is taking on more risk during the build. With a one-time-close loan you may be able to lock the permanent rate up front or float and lock later; each approach is a bet on where rates go during your build, so talk it through with the lender given the current environment. Build in a contingency for both cost and time, because a longer build means more months of interest.

Where the Builder Fits

A good builder makes financing easier in concrete ways: a clean, detailed budget the appraiser and lender can work from, a realistic draw schedule, prompt documentation at each milestone so draws are not delayed, and lien waivers from subcontractors that lenders require. We are set up to work alongside Utah construction lenders and provide what they need at each draw.

Start the Money Conversation Early

The most common financing mistake is treating the loan as the last step instead of one of the first. Get pre-qualified before you finalize the design, because what you can borrow shapes the size and finish level of the home you should draw. Our financing overview at /financing-a-custom-home walks through the path in plainer terms, and our cost estimator at /cost-estimator gives you a starting build number to bring to a lender. Casteca Homes can point you toward local lenders who do construction-to-permanent loans across Southern Utah.