How to Qualify for a Construction Loan in Arizona

How to Qualify for a Construction Loan in Arizona

AZ Construction to Permanent Loans · Part 2 of 3

Part 1 of this series ended with your budget sized and a licensed builder under contract. This part is the loan itself: how a lender decides, what they need from you, and the strangest document meeting in mortgage lending -- the one where a house exists only on paper.

Qualifying, oddly enough, is more orderly than the build will be. Lenders follow written rules, and most of those rules are public.

Two closings or one?

The first decision is baked into the loan's shape: one closing or two.

A one-time close (also called construction-to-permanent) wraps the construction loan and the permanent mortgage into a single deal. Fannie Mae's Selling Guide describes it as one transaction that "close[s] on both the construction loan and the permanent financing at the same time," with the loan converting to your permanent mortgage automatically when the home is finished (Fannie Mae B5-3.1-02). The VA handbook builds its one-time construction loan the same way (VA Lenders Handbook, Ch. 7), Freddie Mac offers both one-time and two-time versions of its construction-to-permanent product (Freddie Mac), and HUD's FHA rules do the one-close dance too (HUD Mortgagee Letter 2019-08, now carried in Handbook 4000.1).

A two-time close splits the job. Loan one is a short construction-only loan. When the house is finished, loan two -- a normal mortgage -- pays it off, and you close on that one separately. LendingTree puts the second closing's cost at 2% to 6% of the loan amount (LendingTree, updated January 22, 2026), and you'll sign a second stack of paperwork too. The VA handbook is matter-of-fact about the bigger catch: with a two-time close, the permanent loan is a brand-new loan, and the lender's underwriter -- the person who checks your file -- reviews it from scratch against the VA's credit and income standards at that second closing (VA Lenders Handbook, Ch. 7, "Two-Time Construction Loan Process").

The payoff for that extra cost and risk is flexibility: when the build is done, you can shop the whole mortgage market with a finished house sitting in front of the appraiser. With a one-time close, your permanent terms are largely set at that first closing -- which buys certainty and gives up the do-over. Neither answer is wrong; they suit different stomachs. Our Arizona construction loans guide keeps a side-by-side of the FHA, VA, USDA, and conventional one-time close options if you want to compare programs.

One detail worth knowing either way: Fannie Mae caps single-close construction periods at 12 months per period and 18 months total, with the permanent loan running no longer than 30 years (Fannie Mae B5-3.1-02). Your build schedule should fit inside that frame with room to spare -- which is the lender's way of agreeing with Part 1's timeline honesty.

Appraising a house that isn't there yet

Every mortgage gets an appraisal. A construction loan gets one for a home that exists only as drawings, which sounds mystical but is really just an appraisal done from plans -- and a rigorous one.

The lender's appraiser values the as-completed house: what the finished home should be worth, judging from your plans, specifications, and budget. The value is explicitly "subject to" the home being finished per those plans (Fannie Mae B4-1.2-05). When the last inspection clears, a shorter completion report confirms the house matches the drawings.

The ordering rules can move your schedule, so they're worth knowing. The VA wants construction exhibits -- plans, specs, and the rest -- delivered with the appraisal request, and says plainly that "appraisers will hold appraisal assignments until the appropriate exhibits are received." For a one-time close it adds that the appraisal "should be ordered before the completion of the foundation" (VA Lenders Handbook, Ch. 7 and Ch. 10). Translation: the appraisal isn't the last step before closing. It's one of the first, and it needs your paperwork finished.

The number that comes back matters twice. Fannie Mae caps the loan at whichever is lower: what the project costs, or what the finished home appraises for (Fannie Mae B5-3.1-02). If the appraisal comes in under your budget, the loan shrinks to the lower number and your savings have to cover the gap.

Appraisals also have a shelf life. On a Fannie Mae single-close, yours must be no older than four months at the day you sign. And if the completion report shows the value dropped during the build, the lender orders a new appraisal and re-checks the loan against the lower figure (Fannie Mae B5-3.1-02).

What the lender will (and won't) finance

Construction loans are picky about what goes inside them. The VA's list of what the loan can pay for reads like a checklist of the whole project: the contract to build, the balance still owed on the land, a pot that pays the interest during the build, a cushion for surprises, and permits when the contract doesn't already cover them (VA Lenders Handbook, Ch. 7). If you own the land free and clear, the VA keeps you honest in the other direction: neither its cost nor its value can be stuffed into the loan. FHA's construction-to-permanent rules work from the same instincts, and add the Part 1 condition that the builder be a licensed general contractor (HUD Mortgagee Letter 2019-08).

Just as useful is what stays out of the loan. The VA won't fold closing costs or discount points -- a fee paid upfront to lower your rate -- into a regular construction loan; those are paid in cash at closing (VA Lenders Handbook, Ch. 8). The design phase from Part 1 was always self-funded. And the cushion for surprises is expected but not micro-managed: neither Fannie Mae, Freddie Mac, nor FHA sets a required percentage for a brand-new build's budget. The percentage rules you may have seen -- Fannie's 10-15%, FHA's 10-20% -- belong to their renovation programs, which are different animals (Fannie Mae B5-3.2-04). How big your cushion should be is a conversation between you, your builder, and your lender.

Land equity: the down payment you're sitting on

If you bought your lot early -- or inherited it, or married into it -- that dirt is doing more than holding a sign.

Start with how the loan math treats an owner. If you're buying the lot with the loan, Fannie Mae caps the loan at the lesser of the total price -- construction plus the lot -- or the finished home's appraised value. If you already own the lot, the loan is measured against the as-completed value alone, and because the loan only has to fund the build, a lot you own outright leaves the loan small next to what the finished home appraises for (Fannie Mae B5-3.1-02). Less borrowed money means less cash to bring to closing.

FHA makes the same advantage explicit. Its rules let land equity count toward the 3.5% minimum down payment, with a six-month clock on how the lot is valued (Part 1's land section covers that rule in detail).

For buyers who picked up Arizona dirt back when it was cheaper, this is often the whole ballgame: the equity does the down payment's job so your savings don't have to.

The document stack

Every lender's checklist is a little different, but the spine of a construction loan's requirements is stable, and Part 1 already got you halfway there:

• The signed builder's contract -- with the builder's license number, start and completion dates, scope, and payment schedule.
• Plans and specifications. The lender sends these straight to the appraiser, so "we'll figure it out as we go" isn't a document.
• An itemized construction budget with the builder's bid behind it.
• Proof you own the land, or the purchase contract for it.
• Your financials: income, debts, assets -- the same story a normal mortgage tells.

That last item has a twist in your favor. A one-time close doesn't make you re-qualify from scratch halfway through the build. Fannie Mae asks lenders to refresh credit and income documents within 120 days before the loan converts, and even allows older credit documents in some cases -- up to 18 months when the loan stays at 95% or less of the home's value with a clean automated approval (Fannie Mae construction-to-permanent FAQs). Freddie Mac runs a similar refresh window with its own longer exceptions. Keep your financial life boring during the build and the paperwork mostly refreshes itself.

As for the numbers you'll hear about: commercial guides put typical construction-loan credit score requirements around 620 to 680 depending on the lender, conventional down payments -- that's a regular non-government loan -- somewhere in the 5-20% band, and debt-to-income expectations in the low-to-mid 40s or below (LendingTree, Bankrate, Rocket Mortgage -- all commercial sources that don't fully agree with each other, so treat them as a wide range rather than a bar). Government-backed floors are firmer: 3.5% down on FHA construction-to-permanent, nothing down on VA. Our Arizona construction loans page keeps the program-by-program numbers, so we won't repeat them here.

Setting your permanent rate before you pour concrete

Here is what makes a one-time close feel different from every other mortgage you've done: the permanent interest rate is on the table at that first closing -- before the foundation is dug.

Depending on the product, the rate you lock that day simply rides until the loan converts when the home is finished. The mechanics of that conversion -- and what happens if you want to change the rate midstream -- are Part 3's territory. Either way, the question "what will my mortgage rate be?" gets answered while the lot is still dirt, not after the move-in boxes are stacked.

Rate strategy deserves a real conversation with your lender: rates move during a twelve-month build, and locking early trades flexibility for certainty. The rate-locking section of our Arizona construction loans guide is the right place to start.

Closing day

After all that, closing day itself is almost anticlimactic. You sign one loan, secured by one property, with a recorded construction rider that makes the build phase official. Your builder's license is already verified. Since March 2025 the VA doesn't even require its builder ID number for most construction loans -- the state license still does the real work (VA Circular 26-25-1). And the money doesn't leave in one wire; it sits in a draw account that pays the builder as work clears inspection.

But that is Part 3's story -- the draws, the inspections, and the year your loan quietly becomes a mortgage. This part's job is done when the loan funds.

Frequently asked questions

What are the requirements for a construction loan in Arizona?

The spine of it: a signed contract with a licensed builder, plans and specifications, an itemized budget, land you own or are buying at closing, and standard financials. FHA adds that the builder must be a licensed general contractor (HUD Mortgagee Letter 2019-08), and in Arizona you can verify any builder's license in about two minutes through the ROC (Registrar of Contractors) contractor search -- Part 1's verification walkthrough shows you how.

Is a one-time close construction loan better than a two-time close?

For most borrowers building with a licensed contractor, yes -- you qualify once, pay one set of closing costs, and set your permanent rate at the first closing (Fannie Mae B5-3.1-02). The two-time close's argument is flexibility: you shop the permanent mortgage when the house is finished, and pay a second round of closing costs for the privilege -- LendingTree puts it at about 2-6% of the loan amount, and it's a commercial estimate, not a rule (LendingTree). The VA treats that second loan as what it is: a new loan, underwritten from scratch (VA Lenders Handbook, Ch. 7).

How does owning my lot change the loan math?

Twice over. On a Fannie Mae single-close, a lot you already own means the loan is sized against the finished home's value rather than the full project cost, so you borrow less and bring less cash to closing (Fannie Mae B5-3.1-02). On FHA, land equity can satisfy the 3.5% minimum down payment, with the six-month valuation rule from Part 1 (HUD Mortgagee Letter 2019-08).

Do I have to re-qualify in the middle of construction?

Not from scratch. On a one-time close your qualification carries through the build -- the lender refreshes your credit and income documents before the loan converts, as described above (Fannie Mae FAQs). A two-time close is the exception -- the permanent loan is a new loan and underwritten as one (VA Lenders Handbook, Ch. 7).

What does a construction loan not cover?

The design phase -- plans, engineering, revisions -- is paid before the loan exists (Rocket Mortgage, commercial). The VA keeps closing costs and discount points out of the construction loan itself (VA Lenders Handbook, Ch. 8). And FHA requires a licensed general contractor for the build -- the only exception is a borrower who is a licensed general contractor themselves (HUD Mortgagee Letter 2019-08). Hiring an unlicensed contractor to build for you is a crime in Arizona, as Part 1's penalty section explains.

None of these numbers have to be guesses either. Call Michael George at AZWM at (480) 613-8040. Bring the plans if you have them. We'll tell you what's missing.

Michael George, NMLS #2280851 | Licensed in Arizona | Equal Housing Lender. Not a commitment to lend. All loans subject to credit approval.