By Alison Schweitzer, Flagstar Private Bank
Summer 2026
How to Finance Your Dream Home Utilizing a Construction Loan
With the thousands of homes that have been lost during the recent fires in California, many people are looking at various financing options to help with the rebuild their property. One option which will be explored below is a residential construction loan.
A construction loan is a financing tool that allows an owner to borrow the funds needed to build a home and this is done with various draw fundings over time. A traditional mortgage provides a funding all upfront, but a construction loan is funded as a percentage of the work that is complete. The construction loan funds a percentage of the land value, soft costs (architect and engineering, plans and specs, permits and fees), hard costs (the cost of ground up construction), contingency (an allowance for cost over runs) and closing costs.
Once a borrower has a signed construction contract and completed plans and specs, it is a good time to find a construction lender to proceed with the underwriting of the construction loan. The contractor is vetted to make sure they have a good track record and are financially stable. The borrower then provides their financial information to include: federal tax returns for both their business and personal returns, any K-1’s, W-2’s, bank, brokerage and retirement statements and current pay stubs. The construction lender will look at the finished value of the project and also the total cost to build in determining a loan amount. The construction loan term will usually match the time needed to complete the project. Some lenders provide a construction and permanent loan that are combined. This is called an all-in-one-close. This type of loan is advantageous to a borrower in that they avoid two sets of closing costs and get to lock in a long term interest rate.
During the construction phase, the lender typically advances funds based on a percentage of the work completed. Lien releases are collected from the contractor/subs to ensure a lien free completion of the home.
Construction Loan to a Standard Home Loan
When you build a home with a construction loan, that loan is meant to be short-term—just to cover the cost of building. Once the house is finished and you have your final inspections and certificate of occupancy, you usually replace that temporary loan with a regular long-term mortgage. This is done either automatically (if you signed up for a “construction-to-permanent” loan from the start) or through a separate refinance, where a new mortgage pays off the construction loan in full and you’re left with one normal monthly payment, just like any other homeowner.
If you have to get a new mortgage, the process looks a lot like a standard refinance. A lender reviews your income, credit, and debts, orders an appraisal of the completed home, and then sets up a closing where the new mortgage money is used to pay off the construction loan. After that, the construction loan disappears, and you just make principal-and-interest payments on your new mortgage over 15, 20, or 30 years. The key timing piece; is making sure the home is finished and approved with a ‘Certificate of Occupancy’, so the lender sees it as a completed property, not an active construction project.
About the Author
Alison Schweitzer is a Group Director at Flagstar Private Bank with over 40 years of experience in construction lending and private banking. She grew up in Pacific Palisades and went to Palisades High School and holds a degree in Economics from UCLA. She has financed over $1 billion in mortgage loans throughout her career and specializes in luxury residential construction projects of $10+ million. As a member of the Pacific Palisades Malibu Chamber of Commerce, she is committed to helping the community rebuild following the January 2025 fires.
Contact: Alison Schweitzer | 949.274.3560 | NMLS 487183 | Alison.Schweitzer@flagstar.com | flagstar.com/privatebank
This article is for educational purposes and does not constitute financial advice. All lending decisions are subject to credit approval and underwriting guidelines. Flagstar Bank, N.A. Member FDIC. Equal Housing Lender.