What is a construction loan? A guide for Colorado homebuilders

They offer flexibility and control, making them ideal for custom home projects or major upgrades.

What is a construction loan?

A construction loan is a short-term loan that covers the cost of building or significantly renovating a home. It typically includes expenses such as:

• Purchasing or paying off land

• Architectural plans and permits

• Labor and materials

• Inspections and closing costs

Once construction is complete, Westerra’s loan is converted to a long-term mortgage.

How construction loans work in Colorado

Colorado’s diverse terrain and seasonal weather patterns make local expertise especially important. Here’s how construction loans generally work:

• Interest-only payments during the construction phase, which usually lasts 12 to 18 months

• Funds are released in stages, known as “draws,” based on construction milestones

• After the build is complete, the loan transitions into a standard mortgage

• Borrowers can often remain in their current home during construction, avoiding the need for temporary housing

Types of construction loans

Construction-to-permanent loans

This option combines the construction loan and mortgage into one package. You only close once, which simplifies the process and saves on closing costs.

Renovation loans

Ideal for homeowners looking to upgrade their existing property. These loans can cover projects like adding a room, remodeling a kitchen or finishing a basement.

Lot loans

If you’re not ready to build but want to secure land, a lot loan allows you to purchase undeveloped property and prepare for future construction.

Common questions about construction loans

Can I use a construction loan for renovations?

Yes. Construction loans are available for ground-up projects as well as substantial home improvements and can be tailored to your specific project.

Do I need a down payment?

It depends. If you are acquiring the land at the same time, the construction loan could require as little as 10% of the total project cost as a down payment. Most Coloradans purchase their land in advance, and in such a case, the equity in the land is taken into consideration. Most construction loans have 20% to 25% equity or more.

What happens if construction costs go over budget?

You’ll need to cover the difference out of pocket or apply for additional financing. It’s important to work with a lender who helps you budget accurately and plan for contingencies.

Can I choose my own builder?

Yes, but your builder must meet the lender’s qualifications. Most lenders require that the contractor be licensed, insured and experienced with similar projects.

What is a draw schedule?

A draw schedule outlines when funds will be released during construction. Payments are made at key stages, such as laying the foundation and doing framing and roofing, based on inspections and progress reports.

Tips for getting a construction loan in Colorado

• Work with lenders who understand Colorado’s building codes and terrain

• Have a detailed budget and timeline before applying

• Choose a licensed and reputable builder

• Understand local zoning laws and land use regulations

• Plan for unexpected costs and delays

Final thoughts

Construction loans offer a powerful way to build or transform your home in Colorado. Whether you’re starting from scratch or upgrading your current space, understanding how these loans work can help you make informed decisions and avoid costly surprises.

Ready to build your dream home? Explore Westerra’s construction and renovation loans, and schedule a consultation today.