What Is a Construction Loan and How Does It Work?

What Is a Construction Loan and How Does It Work?

If you’re planning to build a home instead of buying an existing one, you’ve probably heard the term construction loan—and wondered how it’s different from a traditional mortgage.

For buyers and builders in Louisburg, Prairie Village, Stilwell, Leawood, Overland Park, and the greater Kansas City area, understanding how construction loans work can make the building process smoother and less stressful.

Below, we break it down in simple terms and answer the most common questions borrowers ask.

TLDR (Quick Answers)

  • A construction loan finances the building phase of a home

  • Funds are released in stages as construction progresses

  • Payments are often interest-only during the build

  • Once complete, the loan converts to a mortgage or is refinanced

  • Local banks offer hands-on guidance and better communication

  • Construction loans work best with local lenders and builders

What Is a Construction Loan?

A construction loan is a short-term loan used to pay for building a home from the ground up.

Instead of receiving all the money at once, funds are:

  • Released in draws

  • Paid out as construction milestones are completed

  • Used to pay contractors, materials, and labor

This structure protects both the borrower and the lender during the build.

How Is a Construction Loan Different From a Mortgage in Kansas City?

A traditional mortgage is for a finished home. A construction loan is for a home that doesn’t exist yet.

Key differences:

  • Construction loans are short-term

  • Payments are usually interest-only during construction

  • The loan amount is based on the future value of the home

  • More documentation is required upfront

Once construction is complete, the loan transitions into permanent financing.

How Do Construction Loan Draws Work in Kansas and Missouri?

Construction loans use a draw schedule tied to building stages, such as:

  • Foundation completion

  • Framing

  • Mechanical systems

  • Interior finishes

After each phase:

  • An inspection may be completed

  • Funds are released to pay contractors

This keeps the project moving while maintaining financial oversight.

What Happens When the Home Is Finished?

At completion, borrowers typically:

  • Convert the construction loan into a mortgage, or

  • Refinance into a permanent home loan

Many local banks offer construction-to-permanent loans, which simplify the process and reduce closing costs.

What Do I Need to Apply for a Construction Loan?

Requirements may include:

  • Construction plans and specifications

  • A licensed builder or contractor

  • A realistic project budget

  • Good credit and stable income

  • Down payment or equity

A local lender helps review these details before construction begins. First National Bank can assist in the Kansas City area: Louisburg, Stilwell, Prairie Village, Paola, Olathe, Leawood, Overland Park, Spring Hill, and surrounding areas. 

Why Work With a Local Bank for a Construction Loan?

Construction loans require communication and flexibility—something local banks do especially well.

Benefits include:

  • Face-to-face guidance

  • Local decision-making

  • Familiarity with local builders and inspectors

  • Personalized customer service

Borrowers often appreciate having a real person to call instead of a national call center.

Can I Bundle Other Accounts With My Construction Loan?

Yes. Many borrowers choose to manage everything in one place, including:

  • Checking and savings accounts

  • Construction loans

  • Permanent mortgages

  • Other personal or business loans

Keeping your accounts, loans, and mortgage with one local bank simplifies finances and builds a stronger relationship.

Is a Construction Loan Right for Me?

A construction loan may be a good fit if:

  • You want a custom home

  • You’re working with a builder

  • You plan to live in the home long-term

  • You value local support during the process

Building a home is a major investment—having the right financing partner matters.

Local Guidance Makes Construction Loans Easier

Construction loans can feel complex, but they don’t have to be.

For homebuyers in Louisburg, Prairie Village, Stilwell, Leawood, Overland Park, and the Kansas City area, working with a local bank near you provides:

  • Clear explanations

  • Consistent communication

  • Reliable customer service

  • Financing tailored to your build

When your lender understands your community, the entire building process becomes more manageable.

Your Trusted Community Bank in Miami, Johnson, and Cass County

At First National Bank, we’re proud to serve the communities of Miami, Johnson, and Cass County with personalized, hometown banking. Whether you need personal and business loans, checking and savingss accounts, CDs, IRAs, safe deposit boxes, or cash management services, we have you covered. Looking for home financing options? We offer mortgages, home equity loans, construction loans, refinancing, second mortgages, and swing loans to fit your needs. Stop by one of our convenient locations in Louisburg, Stilwell, or Prairie Village—or reach out to us today to learn how we can help you reach your financial goals.