Construction Loans in Alabama, Explained Plainly

A regular mortgage pays for a house that already exists. Building needs money while the house goes up, so most people use a construction loan, which then turns into (or gets paid off by) a long-term mortgage. Here's how the main options work, from the agencies that run them.

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Not financial advice. We don't list rates or recommend lenders. Rates, fees and approval come from the lender; check the current program rules with them.

How a construction loan works

HomeGuide's summary: construction loans cover the cost of building rather than buying, the money is usually released in stages as the work progresses, and once the house is finished the loan can often convert to a standard mortgage. It adds that borrowers usually need good credit, a detailed construction plan and a licensed builder.^[1]

One closing or two?

Construction-to-permanent (one closing). FHA describes this as a single mortgage closing before construction starts that combines the short-term construction loan with the long-term mortgage. The land must already be yours or be bought at that closing.^[2]
Two-step. You (or the builder) finance construction separately, then take out a permanent mortgage when the house is done. FHA calls its version "Building on Own Land": permanent financing of a newly built house on land the borrower owns, which can pay off the construction loan.^[2]

The trade-off: one closing means one set of closing costs and the long-term loan settled up front. Two steps means two closings, but more freedom in how construction is paid for. Ask any lender to price both.

Government-backed options that allow building

USDA Section 502 Guaranteed

Lets eligible buyers purchase, build, rehabilitate, improve or relocate a home in an eligible rural area with 100% financing, through USDA-approved lenders.^[3]
Household income can't exceed 115% of the area median, and the home must be your primary residence. Rates are set by the lender; terms are 30-year fixed.^[3]
USDA keeps a separate list of lenders that offer its Single Close Construction-to-Permanent loan.^[3]

USDA Section 502 Direct

For low- and very-low-income applicants in eligible rural areas. Funds can be used to build a home or to buy and prepare a site, including water and sewer.^[4]
No down payment is typically required, and applications go through the local Rural Development office year round.^[4]

Is your lot "rural" to USDA? Don't guess. Enter the exact address on USDA's eligibility site.^[5]

FHA (HUD)

Offers both construction-to-permanent and "building on own land" financing, described above.^[2]
In both, you must have a contract with a builder who is a licensed general contractor. You can act as your own general contractor only if you're licensed too.^[2]
If you've owned the land more than six months, FHA counts its appraised value toward the cost; if six months or less, the lower of what you paid and what it appraises for.^[2]

VA-backed loans

The VA lists "build a new home" among the uses of a VA-backed purchase loan.^[6]
You need a Certificate of Eligibility, must meet VA's and the lender's credit and income standards, and must live in the home. A one-time VA funding fee may apply.^[6]

What lenders tend to ask a builder for

A signed construction contract and plans with a cost breakdown (FHA counts the builder's price, or the subcontractor bids and materials, as the cost).^[2]
The builder's license. FHA requires a licensed general contractor^[2], and Alabama requires a home builder license on most new houses built for someone else (see how to check one).^[7]
A draw schedule tied to stages of work, with an inspection before each draw.

Questions to ask a lender

Do you offer a one-close construction-to-permanent loan, and is it conventional, FHA, VA or USDA?
How many draws are there, who inspects before each one, and what does each inspection cost?
Can the value of land I already own count toward the down payment?
Is interest charged only on the money drawn so far during construction?
What happens if the build runs late or over budget?

A builder can usually tell you which local lenders they've closed construction loans with, and what paperwork those lenders asked for.

Call (256) 473‑4809

Sources

HomeGuide, Cost to build a house (national and state ranges, Oct 24, 2025) (accessed Oct 17, 2026)
HUD Mortgagee Letter 2019-08, Construction to Permanent and Building on Own Land (FHA) (PDF) (accessed Oct 17, 2026)
USDA Rural Development, Single Family Housing Guaranteed Loan Program (accessed Oct 17, 2026)
USDA Rural Development, Single Family Housing Direct Home Loans (Section 502 Direct) (accessed Oct 17, 2026)
USDA, Property and income eligibility site (accessed Oct 17, 2026)
U.S. Department of Veterans Affairs, VA-backed purchase loan (accessed Oct 17, 2026)
Code of Alabama § 34-14A-2, Definitions (HBLB) (accessed Oct 17, 2026)