Construction-to-Permanent Loans Maryland | FHA, VA & Conventional | Build Before You Sell

Three Programs

Conventional, FHA & VA Construction Loans Compared.

The right construction loan depends on your credit profile, cash position, and long-term plans. Ken compares all three side by side so you can see the real cost difference, not just the minimum down payment.

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Conventional Construction Loan

The standard construction-to-permanent program for Maryland buyers, and often the best long-term fit for move-up buyers with strong credit and equity. No upfront FHA-style mortgage insurance premium, and with 20% down there is typically no monthly mortgage insurance at all. Conventional C2P is not subject to FHA loan limits, which makes it attractive for higher-priced custom homes, and some programs allow second homes in addition to primary residences.

Down payment: often 5 to 20%, varying by program and scenario
Minimum credit score: typically 680 plus
No upfront mortgage insurance premium; PMI avoidable with 20% down
Property types: primary residence and, in some programs, second home
Reserve requirements are common (see below)
Builder requirement: licensed, lender-approved builder

5-20% down · 680+ credit

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FHA Construction Loan

FHA construction-to-permanent loans follow FHA's standard minimum investment: as little as 3.5% down for borrowers with qualifying credit, calculated from the total acquisition cost, which can include land, construction, contingency reserve, permits, and plans. Eligible gift funds may be used toward the down payment, and if you already own your lot, land equity may often count toward the required investment. FHA can be a powerful option when the main challenge is limited cash, though it includes both upfront and monthly mortgage insurance and is limited to primary residences within FHA loan limits. Some lenders apply overlays, such as higher credit score or reserve requirements, on construction files.

Down payment: 3.5% minimum with qualifying credit
Gift funds allowed from approved sources, with documentation
Land equity may count toward the required investment
More flexible credit guidelines than conventional
Upfront and monthly FHA mortgage insurance applies
Primary residences only, within FHA loan limits
Builder requirement: licensed, lender-approved builder

3.5% down · Flexible credit

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VA Construction Loan

One of the most powerful and underused VA benefits, and one Ken makes sure Maryland veterans know about. Eligible veterans and active-duty service members can build a brand new home with $0 down, using the same VA entitlement as a standard purchase loan. No PMI, competitive rates, and the funding fee can be financed. It is waived entirely for veterans with a qualifying disability rating.

Down payment: $0, none required
Minimum credit score: typically 620 plus
No monthly mortgage insurance
Property type: primary residence only
Builder requirement: VA-approved builder

$0 down · Veterans & active duty

Move-Up Buyers

Can I Build a New Home Before Selling My Current One? Yes.

This is one of the most common questions Southern Maryland homeowners ask Ken, and the answer is yes. With a construction-to-permanent loan you can stay in your existing home during the entire build, move into the new home once the certificate of occupancy is issued, and then sell or even rent your previous home. No renting in between, no moving twice, and no writing offers contingent on a sale. Here is what qualifying looks like.

💳 Will I Have to Qualify With Both Payments?

Usually, yes. Underwriters typically count your current housing payment and the projected payment on the new home, along with taxes, insurance, and other monthly debts, when calculating your debt-to-income ratio. For example, if your current PITI is $2,500 and the new home's projected PITI is $4,000, underwriting may use both unless there is an acceptable plan for the departing residence. Ken runs these numbers with you up front so you know exactly where you stand before you sign a builder contract.

🔑 When Can the Existing Payment Be Offset or Excluded?

Home under contract: a fully executed sales contract on your current home can strengthen the file.
Rental conversion: if you plan to keep the current home as a rental, conventional guidelines may allow documented rental income to offset the departing residence payment, subject to documentation and reserve requirements. This is an area where conventional financing is generally more flexible than FHA.
Significant equity or strong reserves: substantial documented equity or a large liquid asset position may receive favorable underwriting consideration under some programs.
Bridge financing: a bridge loan can unlock existing equity and simplify qualification in some scenarios.

🏦 What Are Reserves, and Why Do They Matter?

Reserves are liquid assets you still have after closing: checking, savings, money market funds, and, subject to calculation rules, retirement accounts. Conventional construction programs frequently require reserves, measured in months of your new housing payment. For illustration: $40,000 in savings after closing with a $4,000 monthly housing payment equals 10 months of reserves. Requirements vary by investor, occupancy, loan amount, and how many financed properties you own, so Ken confirms the exact number for your scenario.

🏠 Can I Use My Current Home's Equity for the Build?

Absolutely, and it is extremely common. Say your current home is worth $700,000 with a $200,000 mortgage balance: that is $500,000 in available equity. Depending on your plan, you may access it through sale proceeds, a HELOC, a cash-out refinance, or bridge financing to reduce the amount you need on the construction loan. Ken maps out which route costs the least for your specific timeline.

📍 A Typical Southern Maryland Example (for illustration only)

A homeowner in Waldorf has a current home worth $650,000 with a $250,000 mortgage balance, a 740 credit score, and wants to build an $850,000 custom home in Charles County. Rather than selling first, they stay in the existing home during construction, use a conventional construction-to-permanent loan, leverage existing equity where needed, move into the new home after completion, and then sell or rent the previous home. For many move-up buyers, conventional ends up being the better fit than FHA because of higher loan amounts, reserve flexibility, and no FHA mortgage insurance. Every scenario is different, and qualification depends on income, assets, credit, and program guidelines.

Inside the Construction Budget

Reserves, Draws & What the Loan Can Include.

Construction lending has moving parts that standard purchase loans don't. Here is how the budget actually works, so nothing at the closing table is a surprise.

📋 What Can Be Financed in the Loan?

Depending on program guidelines, a construction-to-permanent loan may include more than just the build itself:

Land purchase, or land you already own
Construction costs and builder fees
Plans, specifications, and permits
Contingency reserve for unexpected costs
Interest reserve to help cover construction-period interest

If you already own your lot free and clear, the land equity may often be applied toward your required investment, subject to lender guidelines. Eligible property types can include custom site-built homes, modular homes, and certain manufactured homes.

🛡️ The Contingency Reserve: Your Build's Safety Net

Construction projects rarely go exactly to plan. Unstable soil, material price increases, weather delays, and code changes happen. Instead of stopping construction to ask for more money, many construction programs require a contingency reserve, commonly around 5 to 10% of construction costs, set aside at closing. The funds are held by the lender, not handed to the builder, and are released only for approved, documented cost overruns through a change order process.

🧮 Contingency Reserve Example (for illustration only)

Land: $100,000 · Construction contract: $400,000
Contingency reserve at 10%: $40,000
Total project cost: $540,000, and the loan is based on the total
Builder hits unstable soil needing $12,000 in extra foundation work: a change order is submitted, the lender reviews it, and $12,000 is released, leaving $28,000 in reserve
Finish under budget? Unused contingency funds are generally not refunded in cash. They are typically applied as a principal reduction, so you simply owe less on the mortgage
If overruns exceed the reserve, the difference may require borrower contribution or other lender-approved solutions, which is why accurate plans and budgets matter before breaking ground

🔍 How the Draw Schedule Works

Loan funds are not released all at once. They are disbursed in stages as work is completed and verified. A typical schedule, which varies by lender and project, looks like: (1) site preparation and foundation, (2) framing, (3) roofing and exterior completion, (4) mechanical systems including electrical, plumbing, and HVAC, (5) interior finishes, and a final draw after completion and inspections. Before each draw, a progress inspection verifies the work and the percentage of completion. This protects both you and the lender, and it is why you only pay interest on funds actually drawn.

The Process

From Approval to Move-In: The Full Timeline.

1️⃣

Initial Consultation

Discuss your build plans, budget, and timeline with Ken. He confirms your program eligibility, compares conventional, FHA, and VA side by side, and outlines what your builder will need to provide. If you own a home now, this is where the build-before-you-sell strategy gets mapped out.

2️⃣

Approval & Future-Value Appraisal

Full application with income, credit, and assets, plus the builder contract, construction plans, specs, and timeline. The appraiser reviews the plans to determine the home's projected value upon completion. Approval typically takes 30 to 45 days.

3️⃣

One Closing, Rate Locked

Sign closing documents. Your rate is locked, construction funds are committed, and the build can begin.

4️⃣

Construction Draws

Funds are released in stages as construction milestones are reached and inspected. You pay interest only on drawn funds, which keeps payments low during the build.

5️⃣

Certificate of Occupancy

Construction is complete and the local government issues the certificate of occupancy confirming the home is ready to live in. In Charles County, remember the fair share school excise tax applies to new residential construction. Ken factors it into your numbers up front.

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Loan Converts, You Move In

The construction loan automatically converts to your permanent mortgage. No second closing. Your standard monthly payment begins. If you built before selling, this is when your previous home goes on the market or becomes a rental. Welcome home.

Frequently Asked Questions

Construction Loan Questions, Answered.

How does a construction loan work in Maryland?+

A construction-to-permanent loan covers the cost of building your home and then automatically converts to a permanent mortgage when construction is complete, all in one closing. During construction you pay interest only on drawn funds. Once the certificate of occupancy is issued, the loan converts at the rate you locked at closing.

Can I build a new home before selling my current home?+

Yes. Many Maryland homeowners use construction-to-permanent financing to build a new primary residence while continuing to live in their existing home during construction. Upon completion, they move into the new home and then sell or rent the previous residence. Underwriting typically counts both housing payments in your debt-to-income ratio unless there is an acceptable plan for the departing residence, such as a signed sales contract or documented rental income, so it is important to run the numbers with Ken before committing to a builder.

What is the down payment on an FHA construction-to-permanent loan?+

FHA's guideline minimum is 3.5% down for borrowers with qualifying credit, the same minimum investment as a standard FHA purchase. On a $750,000 total acquisition cost, that is $26,250. Keep in mind some lenders apply overlays on construction files, such as higher credit scores or additional reserves, and FHA construction loans include upfront and monthly mortgage insurance and are limited to primary residences within FHA loan limits.

Can I build a $750,000 home with a conventional construction loan?+

Qualified borrowers with good credit, stable income, and sufficient funds for down payment and reserves may be eligible to finance a custom home in that range with a conventional construction-to-permanent loan. The loan can often cover both the land and construction costs and converts to a permanent mortgage once the home is complete. A 700 credit score is generally considered good for these programs, though approval also depends on income, debt-to-income ratio, reserves, employment history, builder approval, and the as-completed appraised value.

Can I build a home in Maryland with a VA loan and $0 down?+

Yes. Eligible veterans and active-duty service members can build a new home with no down payment, no PMI, and competitive rates. The VA funding fee can be financed into the loan and is waived entirely for veterans with a qualifying disability rating. As a retired Navy veteran, Ken walks you through the entitlement details personally.

Do conventional construction loans require cash reserves?+

Usually, yes. Reserves are liquid assets remaining after closing, such as checking, savings, money market funds, and retirement accounts subject to calculation rules, measured in months of your new housing payment. Requirements vary based on occupancy, number of financed properties, loan amount, and overall risk profile, and they tend to matter most when you own multiple properties or are keeping your current home as a rental.

Can I keep my current house as a rental when I build?+

Often yes, provided you meet reserve requirements and can document the rental income according to underwriting guidelines. Conventional guidelines may allow documented rental income to offset the departing residence payment, which is an area where conventional financing generally offers more flexibility than FHA.

Can I use my current home's equity toward the build?+

Yes, and it is very common. Depending on your plan and timeline, equity can be accessed through sale proceeds, a HELOC, a cash-out refinance, or bridge financing to reduce the amount needed on the construction loan. Each route has different costs and qualification implications, so it is worth comparing them side by side.

What is a contingency reserve on a construction loan?+

A contingency reserve is a percentage of the construction budget, commonly around 5 to 10% of construction costs, set aside at closing to cover unexpected expenses during the build, such as unstable soil, material price increases, weather delays, or required code changes. The funds are held by the lender and released only for approved, documented construction cost overruns through a change order process. Think of it as a construction safety net that keeps the project moving instead of stalling while extra funds are found.

What happens to unused contingency funds?+

If the project finishes under budget, the borrower generally does not receive a cash refund. Unused contingency funds are typically applied as a principal reduction to the mortgage balance, meaning you simply owe less on the loan. That is a genuine benefit: a smooth build can leave you with a smaller mortgage than you closed on.

Can I use the contingency reserve for upgrades?+

Generally, no. The reserve is intended for unforeseen construction costs, not elective upgrades or luxury additions after closing. If total costs exceed the reserve, the difference may require a borrower contribution or another lender-approved solution, which is why accurate plans, specifications, and budgets before construction starts are so important.

Can I buy land and build with one loan? What if I already own the lot?+

Yes. If you have not purchased the lot yet, the loan can often include both the land purchase and construction costs in one financing package. If you already own the land, its equity may often be applied toward your required investment, subject to lender guidelines, which can significantly reduce the cash you need to bring to closing.

Can I act as my own builder or general contractor?+

Generally, no. Most construction-to-permanent programs require an approved, licensed builder who carries adequate insurance and provides plans, specifications, a detailed construction contract, and lender registration documentation. This protects the project, the lender, and ultimately you.

Can I use gift funds for an FHA construction loan down payment?+

Yes. FHA permits eligible gift funds from approved sources toward the down payment, subject to documentation requirements such as a gift letter. Combined with FHA's 3.5% minimum investment, this can make building far more accessible than many buyers expect.

What types of homes qualify for a construction-to-permanent loan?+

Eligible property types may include custom site-built homes, modular homes, and certain manufactured homes. Primary residences are eligible across programs, and some conventional programs allow second homes, depending on program guidelines and investor requirements.

Can first-time homebuyers use a construction loan?+

Yes. Many first-time buyers use construction financing to build a home that fits their needs rather than competing for limited resale inventory. Approval is based on income, assets, credit, and project feasibility, and FHA's 3.5% minimum down payment option can make it surprisingly attainable.

What credit score do I need for a construction loan?+

Conventional construction loans typically require 680 plus credit. VA construction loans typically require 620 plus for eligible veterans. FHA offers more flexible credit guidelines, though lender overlays on construction files can raise the bar. Construction loans have slightly higher credit requirements than standard purchase loans because the lender is financing a home that does not yet exist.

Do I need a specific builder?+

Yes. Conventional and FHA construction loans require a licensed builder who meets lender approval criteria, and VA construction loans require a VA-approved builder. Ken helps you understand what documentation your builder needs to provide and what the approval criteria look like so there are no surprises.

What do I pay during the construction period?+

During construction you pay interest only on the funds that have been drawn. Since draws happen in stages as work is completed, your payment starts low and increases as more of the loan is disbursed. This is far more manageable than paying rent and a full mortgage payment at the same time during the build.

How early should I start the financing conversation?+

As soon as you have a builder selected, or even before. You will need a signed builder contract, construction plans and specs, a build timeline, and builder's risk insurance in addition to standard mortgage documents. If you plan to build before selling your current home, starting early also gives time to structure the departing residence strategy. Starting early keeps your build schedule from waiting on your loan.

Construction Loans for Maryland Buyers. One Closing. Three Ways to Build.

Construction-to-Permanent: One Loan, Two Phases.

🔨 Phase 1: Construction (est. 8 to 12 months)

🏠 Phase 2: Permanent Mortgage