CONSTRUCTION · CALIFORNIA
Construction Loans in California — New Build & Renovation
Construction loans in California finance ground-up new home construction, major renovations, teardown-rebuilds, and ADU construction. Ground-up builds, gut renovations, and ADU construction financing.
California construction loans finance ground-up new home construction, major renovations, teardown-rebuilds, and ADU (accessory dwelling unit) construction. Save Financial originates California construction loans through both single-close construction-to-permanent programs (one loan, one closing, one set of fees) and traditional two-close construction loans (interim financing, then a separate refinance to permanent). California construction loans typically require 20%–30% down (or equivalent equity in the land), credit minimums of 680+, a fully detailed construction budget with itemized line items, an approved general contractor with appropriate California licensing, and a feasibility appraisal estimating the completed value. Loan amounts range from $200,000 (small ADUs) to $5 million (custom luxury new builds). Funds are released to the builder in draws as construction milestones are inspected and verified — typically 5–8 draws over a 6–14 month build period.
— QUICK ANSWER
A California construction loan finances ground-up new builds, ADU additions, or major home expansions through staged draws as construction progresses. Single-close construction-to-permanent loans (the most common structure) combine the construction phase and the 30-year permanent mortgage into one loan with one closing. Save Financial originates California construction loans up to 80% loan-to-value with 4–6 staged draws over a 12-month construction period, then auto-converts to a fixed-rate 15 or 30-year permanent mortgage at completion.
Quick reference: key facts
| Specification | Detail |
|---|---|
| Type | Single-close construction-to-perm |
| Down payment | 20–25% |
| Construction term | 12 months typical |
| Permanent loan term | 15 or 30 yrs fixed (auto-converts) |
| Draws during build | 4–6 staged |
| Best for | Custom or speculative new builds, ADU additions |
What is the difference between single-close and two-close construction loans?
California construction loans come in two structures. The difference matters because it determines closing costs and rate risk:
Single-close (construction-to-permanent): One loan, one closing, one set of fees. You lock the permanent rate at the start of construction. When the build completes, the loan automatically converts to a 30-year fixed permanent mortgage. Save Financial's most popular construction program. Better for: borrowers who want rate certainty and one closing.
Two-close: A short-term construction loan (interim financing) during the build, then a separate permanent refinance after completion. Two sets of closing costs, but you can shop rates at completion. Better for: borrowers who expect rates to drop during construction, or who want to convert to a different loan type at completion.
Single-close trade-off: Single-close locks the permanent rate up to 14 months in advance. If rates drop substantially during construction, you're stuck at the higher locked rate — though most single-close programs include a float-down option (typically 0.25% threshold, one-time use).
Most California borrowers choose single-close because the rate environment is uncertain and rate certainty is worth more than the optionality of waiting to lock.
How California construction loan draws work
Construction loans fund in stages tied to completion milestones. Typical draw schedule:
Draw 1 (10–15%): Initial funding for site prep, permits, foundation, and slab.
Draw 2 (15–20%): Framing complete, roof on, exterior walls weathertight.
Draw 3 (15–20%): Rough plumbing, electrical, HVAC installed.
Draw 4 (10–15%): Drywall, insulation, exterior finish.
Draw 5 (15%): Interior finish — flooring, cabinets, paint, fixtures.
Draw 6 (10%): Final mechanical, appliances, landscape, final inspection.
Draw 7 (5–10%): Punch list, certificate of occupancy, final reconciliation.
Each draw requires:
- Lender inspection (typically a fee of $150–$250 per draw)
- Lien releases from subcontractors
- Updated insurance certificates
- Completion percentage signed off by the appraiser or inspector
During construction, you pay interest only on the amount drawn — so your payment grows as the build progresses. At completion, the loan amortizes over the chosen term.
What California-specific rules apply to construction loans?
California has its own quirks that affect construction financing:
Title 24 energy compliance: California's stringent energy efficiency requirements (solar mandate on new construction since 2020, all-electric requirements in many jurisdictions). Lenders verify Title 24 compliance documentation.
California Contractors State License Board (CSLB): All general contractors and major subs must hold valid California licenses. Save Financial verifies CSLB status before closing.
Mechanic's lien protection: California has strong mechanic's lien rights for unpaid subcontractors. Lenders require lien releases at every draw and may hold final 10% retention until the lien period expires.
Permits and impact fees: California construction projects face substantial permit and impact fees ($30,000–$150,000 on a typical new SFR). These are part of the construction budget the lender funds.
Owner-builder restrictions: California allows owner-builder construction on your own residence, but most lenders require a licensed general contractor. Owner-builder construction loans exist but are limited and have stricter LTV caps.
Insurance during construction: Builder's risk insurance is required during construction, plus general liability and workers' comp on the contractor. Lenders verify continuous coverage.
How do ADU construction loans work in California?
Accessory Dwelling Unit (ADU) financing has exploded since California's AB 68 and SB 9 streamlined ADU approvals statewide. Most California cities now approve ADUs in 60 days or less with limited setback and parking requirements.
Three ways to finance a California ADU:
1. HELOC against the primary residence ($50K–$500K depending on equity). Best for ADUs under $200K total cost or homeowners with low first-mortgage rates they want to preserve.
2. Cash-out refinance: Refinance the first mortgage and pull cash for ADU construction. Best when current first-mortgage rate is similar to today's rates.
3. Dedicated ADU construction loan: Single-close construction loan that includes the ADU build into a combined first mortgage on the property. Best for major ADU projects ($250K+) or ADUs being built simultaneously with a primary residence renovation.
California ADU economics: The California Department of Housing and Community Development estimates the average permitted ADU costs $180,000–$280,000 to build. Detached new construction tends to be 30%–40% more than garage conversions. ADUs typically rent for $1,800–$3,500/month in California metros — paying back the build in 7–12 years.
What does a real California construction loan look like?
Scenario: Lot purchased for $720,000. Owner plans a 3,200 sq ft custom home, projected to cost $1.2M to build. Total all-in budget: $1.92M. Expected completion value: $2.4M.
Structure:
- Construction-to-permanent single-close loan at 75% of completed value: $1.8M maximum
- Owner equity required: $720K land equity + $120K cash to closing = $840K (35% effective equity)
- Construction rate during build: 7.85% (prime + 0.50%)
- Permanent rate locked at start: 6.95% 30-year fixed (currently slightly above market due to 12-month rate lock premium)
- Construction period: 11 months, 6 draws
- Average interest during construction: roughly $5,800/month (varies as more is drawn)
Total construction interest paid: approximately $64,000 over 11 months. At completion, the loan converts to a 30-year fixed at 6.95% with a $1.8M principal balance.
— FAQ
Common questions about California Construction Loans
How much do I need to put down on a California construction loan?
Most California construction loans require 20%–30% equity, calculated against the completed value (not just the lot value). If you already own the land outright, the land equity often satisfies the down payment requirement. With financed land plus construction, total cash to closing typically runs 15%–25% of the all-in budget.
Can I be my own general contractor (owner-builder)?
California allows owner-builder construction on your own primary residence, but most lenders — including Save Financial — require a licensed general contractor for construction loan eligibility. Owner-builder loans exist but are limited to programs with stricter equity requirements (typically 35%–40% down).
Do I pay interest on the full construction loan from day one?
No. You pay interest only on the cumulative amount drawn. Early in construction when only 10%–15% has been drawn, your interest payment is small. As more milestones complete and additional funds are drawn, the interest payment grows. At completion, the full balance amortizes.
What happens if construction goes over budget or runs long?
Cost overruns must be funded by the borrower out of pocket — the construction loan amount is fixed at closing. Time overruns within a reasonable window (60–90 days past projected completion) are usually accommodated; longer delays may require an extension fee or a loan modification. Save Financial recommends a 10%–15% contingency in every construction budget.
Can I get a construction loan for an ADU on my existing home?
Yes. Save Financial offers dedicated ADU construction loans plus alternatives (HELOC, cash-out refinance). For ADUs under $200K, a HELOC against the primary residence is often the simplest. For larger or detached ADU builds, a single-close construction loan is usually best.
How long does a California construction loan take to close?
Construction loan closings take 30–45 days from full application — longer than purchase loans because the lender must review plans, the builder's licensing and financial strength, the detailed budget, and the feasibility appraisal. Start the process 60+ days before you want construction to begin.
How does Construction financing compare to Renovation and Bridge?
| Construction-to-Perm | Renovation (203k/HomeStyle) | Bridge Loan | |
|---|---|---|---|
| Purpose | New ground-up build | Existing-home rehab/expansion | Short-term gap financing |
| Single close? | Yes (one closing, converts to perm) | Yes (one closing) | No (separate from end loan) |
| Down payment | 20–25% | 3.5–5% (FHA 203k) / 5% (HomeStyle) | 20–35% equity |
| Term | 12 mo. construction, then 15/30 yr fixed | 15 or 30 yrs fixed | 6–24 months |
| Draws during build? | Yes (4–6 staged) | Yes (escrow held) | One lump sum |
| Best for | Custom or speculative new builds | Buyers fixing up an existing home | Quick equity access before refi |