Construction Loan Disclosures: How the Two Phases Work

Published by the Modern Lending Solutions editorial team. Last reviewed: October 30, 2026.

Short answer: a construction loan pays out in draws as the home is built. When the same lender may also provide the long-term loan, it may disclose the construction phase and the permanent phase as one loan or as separate loans. Because the draw dates and amounts are not known up front, the federal rules let the lender estimate interest by assuming half the loan amount is outstanding for the whole construction period, when you pay interest only on what has been drawn. For new construction, the lender may also issue a revised Loan Estimate if settlement is expected more than 60 days out and the first estimate said so. This page covers federal law only; other rules may apply where you live. It is general information, not legal or financial advice.

Construction-only vs construction-to-permanent

The CFPB describes a construction loan as a short-term loan that pays for building or rehabilitating a home, with money provided in a series of advances as the work goes on; you may pay off the balance in a lump sum or may be able to convert it to a regular mortgage, but if it does not convert on its own you may have to apply for a new loan (CFPB, last reviewed September 11, 2024, read October 30, 2026; this page may be out of date).

The official comments describe a construction-to-permanent loan as two phases: during construction, funds go out at times and in amounts not known at the start and you pay accrued interest; then, unless it is paid off, the loan converts to permanent financing that is paid down like a standard mortgage (Supplement I, comment 17(c)(6)-2, eCFR, text up to date as of October 28, 2026, read October 30, 2026).

One set of disclosures or two

When a multiple-advance loan to build a home may be permanently financed by the same lender, “the construction phase and the permanent phase may be treated as either one transaction or more than one transaction” (12 CFR 1026.17(c)(6)(ii), eCFR). The comments say this works whether you are bound to take only the construction financing or both phases from the start; if you are bound to both and the lender gives two sets, you must get both sets at the start (comment 17(c)(6)-2).

The comments to Appendix D also say how the Loan Estimate and Closing Disclosure show the term when both phases are disclosed together: the term is the two combined, so a 12-month construction phase and a 30-year permanent loan show a 31-year term (comment app. D-7.i).

How interest is estimated when draws are unknown

Appendix D gives lenders an optional way to estimate the interest, finance charge and annual percentage rate (APR) when the draw schedule is not known (eCFR). For a construction phase disclosed on its own:

If you pay interest only on the amount actually drawn, the lender assumes half the loan commitment is outstanding at the contract rate for the whole construction period (Part I.A.1).
If you pay interest on the full commitment no matter when funds go out, it assumes the full commitment is outstanding for the whole period (Part I.B.1).
Either way, the APR is figured as a single-payment loan due at the end of construction, using half the commitment minus any prepaid finance charge as the amount financed for the math; the amount financed shown to you is the full commitment minus any prepaid finance charge (Part I.A.2 and A.4).

This example is only for the math, with example figures, not terms from any lender. It assumes interest is charged only on drawn amounts and the construction phase is disclosed separately.

Item	Amount
Loan commitment	$300,000
Contract interest rate	7.5%
Construction period	12 months
Prepaid finance charge	$3,000
Half the commitment	$150,000
Estimated interest: $150,000 x 7.5% for 12 months	$11,250
Finance charge: $11,250 + $3,000	$14,250
Amount financed for the APR math: $150,000 - $3,000	$147,000
Estimated APR for a one-year single payment loan: $14,250 / $147,000	about 9.69%
Amount financed shown on the disclosure: $300,000 - $3,000	$297,000
For comparison, interest if charged on the full commitment	$22,500

Your actual interest depends on when and how much is drawn. The comments say an interest reserve, a part of the loan set aside to pay interest as it builds up, is not a prepaid finance charge; if the lender takes interest from the reserve automatically, interest on that interest must be reflected in the disclosures (comment app. D-5).

Revised Loan Estimates for delayed settlement

For a loan involving new construction, if the lender reasonably expects settlement more than 60 days after the Loan Estimate, it may send a revised estimate, but only if the first Loan Estimate clearly said that it may issue revised disclosures at any time before 60 days before closing. Without that statement, it may revise only for the other listed reasons (12 CFR 1026.19(e)(3)(iv)(F), eCFR). The comments say a loan to buy a home not yet built, or under construction, counts; a home with a use and occupancy permit issued before the Loan Estimate does not (comment 19(e)(3)(iv)(F)-1). For the general limits on how much costs may rise, see Loan Estimate closing cost limits; the CFPB also explains revised estimates (CFPB).

Ability-to-repay rules and the construction phase

The federal ability-to-repay requirements in 1026.43(c) through (f) do not apply to a temporary loan of 12 months or less that finances the initial construction of a home, or to a construction phase of 12 months or less of a construction-to-permanent loan (12 CFR 1026.43(a)(3)(ii)-(iii), eCFR). The permanent phase is not covered by that exception. See the mortgage ability-to-repay rule. A higher-priced construction loan is also exempt from the escrow requirement; see the higher-priced mortgage escrow rule.

Questions to ask the lender

Is this construction-only, or does it convert to a permanent loan with you? Do I need to apply again at conversion?
Will the two phases be disclosed together or separately, and will I get both sets now?
Do I pay interest only on what has been drawn, or on the full amount?
How are draws checked and paid out, and is there an interest reserve?
Does my Loan Estimate say you may revise it if settlement is more than 60 days away?
Is the permanent rate set now, or later? What would change it?

Checklist

Know whether the loan is construction-only or construction-to-permanent.
Check whether the disclosures cover one combined loan or two phases.
Check how interest is figured: on drawn amounts or on the full commitment.
Read the Loan Estimate for a statement about revisions before settlement.
For your own case, ask a lawyer; you can look for legal aid through the Legal Services Corporation.

To complain about a lender, use consumerfinance.gov/complaint; for legal aid see the Legal Services Corporation.

Start your loan request How our service works

Sources

Disclosure: Modern Lending Solutions is not a lender, loan broker or agent for any lender or loan broker, and does not make credit decisions. Any compensation we receive is paid by participating lenders, only for advertising services. This guide is general information, not financial or legal advice.

Construction Loan Disclosures: What the Federal Rules Say