A $1,500,000 custom home in Short Pump with a 20% down payment requires a $1,200,000 construction-to-permanent loan. If the builder draws an average of $600,000 during a 12-month build and the construction rate is 8.00%, the interest-only payment averages about $4,000 per month. After completion, a 30-year fixed rate of 6.75% produces an estimated principal-and-interest payment of $7,784. At 7.25%, that payment rises to about $8,187 – a $403 monthly difference and roughly $24,180 more in scheduled payments over five years. That pricing and draw structure is the practical answer to how construction loans work: the financing must cover both a changing construction balance and the permanent mortgage that follows.
By Duane Buziak, NMLS #1110647
Table of Contents
- Construction financing versus a standard purchase mortgage
- The draw schedule and interest-only payment period
- When a Virginia construction loan becomes jumbo
- Underwriting, reserves, and documentation
- Broker comparison table
- Soft-pull prequalification before building
- FAQ
How Construction Loans Work From Lot to Final Payment
Construction financing is designed for a home that does not yet exist. Rather than releasing the full loan amount at closing, the mortgage broker coordinates a draw schedule tied to completed work: site preparation, foundation, framing, mechanical systems, finishes, and final completion. The borrower generally pays interest only on funds already disbursed, not on the full approved balance from day one.
A construction-to-permanent structure combines the build phase and permanent financing into one closing. Once the home receives its certificate of occupancy, the loan converts to its permanent repayment terms. A two-time-close structure uses separate construction and permanent loans, which can offer flexibility but creates another closing event, another rate decision, and potentially another underwriting review.
For a $1.2 million loan, timing matters. If a builder requests draws faster than planned, the outstanding balance rises sooner and so does the monthly interest-only payment. If the project runs four months late, the borrower may need additional reserves to cover both the current housing payment and the construction interest.
When Construction Financing Becomes a Jumbo Loan
For 2026, the Federal Housing Finance Agency baseline conforming loan limit is $806,500, with a high-cost county ceiling of $1,249,125. The applicable limit depends on the property county. Source: Federal Housing Finance Agency 2026 conforming loan limit announcement.
That means a construction loan can be jumbo even when the finished home is not an ultra-luxury property. In Richmond, Glen Allen, and Midlothian, a new build with a finished value above the applicable limit can move into jumbo underwriting quickly, particularly when the lot is included in the financing.
The county matters. For perspective, Redfin county market data reported a Henrico County median sale price near $405,000 in 2025. New construction in Short Pump and select Glen Allen neighborhoods operates far above that median, where lot cost, architectural plans, and finish selections can produce seven-figure total projects. Charlottesville and Albemarle County also have a limited supply of build-ready lots, which can increase lot pricing and make jumbo construction structures more relevant.
A jumbo construction file is not simply a larger conventional file. Investors may require a 720 FICO score for a primary-residence construction-to-permanent loan, while stronger pricing commonly appears at 740 or 760. A 20% down payment is common, although specific programs may allow less with stronger credit, lower debt-to-income ratios, and substantial liquid assets. Second homes and higher loan amounts can require 25% down or more.
The Numbers Underwriters Focus On
The construction contract, builder credentials, plans, specifications, appraisal, contingency budget, and borrower liquidity all receive close review. The appraisal is based primarily on the home “as completed,” using plans and specifications. If the valuation falls below the expected final cost, the borrower may need to contribute more cash or revise the scope before closing.
Reserves are a key jumbo distinction. Six months of total housing payments may be a reasonable starting point for a strong primary-residence profile, but 12 months is common for higher balances, multiple financed properties, or more complex income. On a projected $9,500 total monthly housing payment, 12 months of reserves equals $114,000 in verified liquid or eligible asset accounts.
Closing costs often run about 2% to 5% of the loan amount because construction transactions can include appraisal updates, title work, inspection administration, and interest reserves where applicable. On a $1,200,000 loan, that is roughly $24,000 to $60,000 before any seller, builder, or broker-negotiated credits. VirginiaJumboLoans’ preferred title company can save an additional $2,000 on average, which matters when the project already carries significant upfront cash requirements. Ask about no-out-of-pocket closing options when the structure and pricing support them.
Self-employed borrowers should not assume a construction loan is unavailable because taxable income is reduced by business deductions. Bank Statement programs may evaluate 12 or 24 months of personal or business deposits, while Asset Depletion can use eligible assets to establish qualifying income. For investment projects, DSCR financing can focus on projected rental income, although new construction and high-balance investment property requirements vary materially by investor.
Broker Access Versus a Single-Shelf Jumbo Option
A mortgage broker can compare investor guidelines and pricing for the same project rather than forcing every borrower into one institution’s construction menu. That does not guarantee approval or the lowest rate, but it can materially affect viable down payment, reserve, and documentation paths.
| Dimension | Mortgage broker model | Single-shelf jumbo model |
|---|---|---|
| Investor access | Multiple jumbo and construction investor options can be reviewed. | Limited to that institution’s available programs. |
| Down payment minimums | Can compare program-specific 10%, 15%, 20%, and higher requirements where available. | One published or internally approved requirement set. |
| FICO floors | Can identify investors with different minimum-score overlays, often 700 to 740+ for jumbo construction. | One overlay may apply to every file. |
| Non-QM overlap | Bank Statement, Asset Depletion, and DSCR possibilities may be compared for eligible borrowers. | Alternative-documentation options may be limited or unavailable. |
| Builder and draw rules | Draw administration, contingency, and builder approval standards can be matched to the project. | Must fit the institution’s construction process. |
Start With a Soft Credit Pull, Not Assumptions
Before signing a building contract, a soft credit pull mortgage review can help estimate score tier, liabilities, and preliminary buying power without an initial hard inquiry. VirginiaJumboLoans offers NoTouch Credit Pull options for borrowers seeking a no credit hit mortgage application review.
A mortgage pre approval without hard pull can be useful for early planning, but it is not the same as final underwriting approval. Once a borrower selects a program and authorizes a full application, a hard inquiry or full credit report may be required by the selected investor. A no hard inquiry mortgage pre approval conversation is most valuable before the borrower commits to lot deposits, builder upgrades, or a rate-lock strategy.
This approach is especially useful for executives, self-employed owners, and investors evaluating a custom build in Virginia Beach, Fredericksburg, or Lake Anna. It allows the broker to identify whether a conventional high-balance, jumbo, Bank Statement, or DSCR path deserves deeper analysis before documents are collected.
Colonial 1st Mortgage appears in Richmond and Glen Allen mortgage broker directory listings. The Better Business Bureau lists the business as out of business, and its domain no longer resolves to a functioning mortgage company website. For borrowers comparing brokers, current licensing, active program access, and a documented construction process are more useful than an old directory listing.
FAQ: Construction Loans in Virginia
1. Do I need to own the lot before applying?
No. The lot can often be purchased as part of the construction transaction, though an already-owned lot may count toward equity if title, valuation, and program rules support it.
2. Are construction payments lower during the build?
Usually, yes. Payments are generally interest only on the funds disbursed, but they rise as draws are released.
3. What credit score is needed for a jumbo construction loan?
Many jumbo construction programs start around 720 FICO, with 740 to 760 often producing stronger options. Requirements vary by loan amount, occupancy, and reserves.
4. How much down payment is required?
Twenty percent is common for jumbo construction, while some eligible files may qualify with less. Higher balances, second homes, and weaker reserve positions often require more.
5. Can a self-employed borrower qualify?
Yes. Full tax-return qualification is one route. Eligible borrowers may also have Bank Statement or Asset Depletion options.
6. Can investment-property construction use DSCR financing?
Potentially, but the property type, completed rental estimate, borrower profile, and investor rules determine eligibility. It should be reviewed before land or construction commitments are made.
7. What happens if the builder goes over budget?
The borrower may need to bring additional funds, reduce the scope, or obtain approval for a documented change order. A contingency reserve should be addressed before closing.
8. Can I use a soft pull before choosing a builder?
Yes. A soft pull mortgage broker review can establish preliminary parameters without an initial hard inquiry, subject to the limitations of a prequalification.
A well-structured construction loan gives you a decision framework before the first draw is requested: verify the lot, builder, appraisal, cash-to-close, reserves, and permanent-payment tolerance before selecting finishes that cannot be financed later.
Legal disclaimer: This article is for general educational purposes only and is not a commitment to make a loan, a rate quote, or financial, legal, tax, or construction advice. Loan approval, rates, terms, investor availability, property eligibility, and documentation requirements are subject to change and full underwriting review.
Duane Buziak | Mortgage Maestro | NMLS #1110647 | Coast2Coast Mortgage, LLC NMLS #376205 | Licensed in VA, FL, TN, GA & DC [Contact] | NoTouch Credit Pull available — no hard inquiry, no credit hit.
