Using a Construction Loan to Build Your Retirement Dream Home
Construction loans operate a little differently than a typical home mortgage, so you need to know a couple of things: like what's the difference between a construction-to-permanent loan and a stand-alone construction loan.

Retirement has finally arrived, and you've checked all the right boxes. Mortgage paid off, check. Loans to help kids through college paid, check. Nest egg ready for the future, check. You've found a great spot to build your retirement dream home and you're ready to bring your blueprints to life. But there's one step you haven't yet navigated: getting a construction loan to finance the project.
Sure, you've borrowed from the bank before. But construction loans can be quite a bit more nuanced than traditional mortgages. A common step for borrowers is to start the process by getting pre-qualified for a home construction loan.
Construction Loan Options
There are two primary varieties of construction loans: construction-to-permanent and stand-alone. The distinction is important and there are benefits of each, depending on your financial situation.

Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
A construction-to-permanent loan, sometimes referred to as a single-close construction loan, converts into a permanent mortgage after the house is built. There is just one closing at the start of construction, so you only pay closing costs once. What's more, you can lock in your interest rate for the lifetime of the loan. Once your build is completed, your lender converts the construction loan into a permanent fixed- or adjustable-rate mortgage.
By contrast, a stand-alone construction loan covers just the home build. Once the work is completed, you'll need to secure a separate mortgage to pay off the construction debt, therefore requiring two closings and sets of fees. Another disadvantage of a stand-alone loan is that you can't lock in a mortgage rate. That means you run the risk of rates rising before you are ready for that second loan. However, stand-alone construction loans tend to require lower down payments and do allow borrowers to shop around for a mortgage once their home build is complete.
Both construction-to-permanent and stand-alone loans only require you to make interest payments while your dream house is being built, and it's typically a variable rate during construction. Your lender will pay funds directly to the contractor in installments at various pre-defined benchmarks, known as a "draw schedule." Your lender and your builder will work closely to ensure your project and your payments stay on track.
Qualifying for a Construction Loan
Even if you have a stellar credit score, it's a good idea to get your ducks in a row before submitting a construction loan application. You'll need to prepare all of the same documents required for securing a traditional mortgage, plus a comprehensive list of the construction details.
Here's a basic checklist of what you may need to supply to your lender as part of your construction loan application:
- Current financial statements covering debt, income and asset information.
- A signed construction or purchase contract with your builder or developer that includes project plans, specs and budget details.
- A timetable for construction that includes start and completion dates.
Your lender will closely review the project plans and contract to ensure your builder's quoted costs are aligned with market costs. They will also consider factors like budget overrun and unanticipated upgrades — as it's not uncommon to splurge on granite countertops once kitchen construction begins. Some lenders may also request financial information from the builder to ensure they will be financially solvent throughout the project.
Getting Started
Because construction loans have higher underwriting standards, many people work with a bank they already have a relationship with. That said, you might want to comparison shop to ensure that your bank's fees and interest rates are competitive. It's important to remember that this will be a long-term relationship, so you should find a knowledgeable loan officer who will take the time to talk through your options, provide personalized guidance based on your financial situation and do due diligence on your contractor's plans.
Building a retirement nest to your own specs requires a bit of legwork, but the result will be enjoyed for years to come. And it means you can whittle one more box off your list: Dream home ready to go, check.
Get Kiplinger Today newsletter — free
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.
Rick Bechtel is EVP, Head of U.S. Residential Lending for TD Bank . With nearly 30 years of industry experience, he is responsible for growing TD Bank's mortgage business and sales force, maintaining the bank's risk appetite and unique focus on the customer, and optimizing best-in-class technology across the business.
-
RMD Deadline April 1: Five Tax Strategies to Manage Your 2025 Income
Taxable Income The April 1, 2025, deadline for required minimum distributions (RMDs) is fast approaching for retirees who turned 73 in 2024.
By Kelley R. Taylor Published
-
Rising AI Demand Stokes Undersea Investments
The Kiplinger Letter As demand soars for AI, there’s a need to transport huge amounts of data across oceans. Tech giants have big plans for new submarine cables, including the longest ever.
By John Miley Published
-
The Three Biggest Fears Keeping Retirees Up at Night
Here are the steps you can take to put those fears to rest and retire with confidence so you can relax and enjoy the life you've planned.
By Pam Krueger Published
-
What Can a Donor-Advised Fund Do for You? (A Lot)
DAFs and private foundations go about helping charities (and those who donate) in different ways. Each comes with its own benefits and restrictions to navigate.
By Julia Chu Published
-
Estate Planning When You Have International Assets
Estate planning gets tricky when you have assets and/or beneficiaries outside the U.S. To avoid costly inheritance mistakes, it pays to understand the basics.
By Kelsey M. Simasko, Esq. Published
-
Three Essential Estate Planning Steps to Protect Your Nest Egg
After dedicating years to building your wealth and securing your future, make sure your assets are protected and your loved ones are provided for in the future.
By Nicole Farbo, CFP® Published
-
Is Chasing the American Dream Ruining Your Financial Life?
Too many people focus on visible affluence as a marker of success. Here's how to avoid succumbing to the pressure and driving yourself into debt.
By Anthony Martin Published
-
Retiring With a Pension? Four Things to Know
The road to a secure retirement is slightly more intricate for people with pensions. Here are four key issues to consider to make the most out of yours.
By Joe F. Schmitz Jr., CFP®, ChFC® Published
-
Revocable Living Trusts: The Good, the Bad and the Ugly
People are conditioned to believe they should avoid probate at all costs, but when compared with living trusts, probate could be a smart choice for some folks.
By Charles A. Borek, JD, MBA, CPA Published
-
How to Plan for Retirement When Your Child Has Special Needs
When your child has special needs, your retirement plan should include a plan for when you'll no longer be able to care for them yourself. A five-step guide.
By Christopher M. Butterworth, ChSNC®, CRPS, CLU® Published