Building a custom home in Lebanon County? Here’s what you need to know about how it gets paid for — before you break ground.
You’ve found the lot. You’ve started sketching floor plans in your head. Maybe you’ve even talked to a builder. And then someone asks: “So, how are you financing it?”
Buying a home means getting a mortgage. Building one is a different process entirely, and it starts with a construction loan. If you’re planning to build in Lebanon, PA or the surrounding area, understanding construction financing is one of the most important steps you can take before anything else.
Why a Regular Mortgage Won’t Work (At First)
Traditional mortgages are underwritten against an existing property — something a lender can appraise and use as collateral. A home that doesn’t exist yet doesn’t check those boxes.
Construction loans fill that gap. They’re short-term loans designed specifically to fund the building process, covering costs like land, materials, labor, and permits. Rather than releasing a lump sum upfront, the lender disburses funds in stages as construction progresses. Once the home is complete, the loan either converts to a permanent mortgage or is paid off with one.
The Two Main Loan Structures
Construction-to-Permanent (One-Time Close) The most popular option for homebuyers today. You go through approval and closing once, your rate is locked at the start, and when construction is complete, the loan automatically converts to your long-term mortgage. No second application, no second round of closing costs. For most buyers building a primary residence in Central PA, this is the more practical choice.
Construction-Only (Two-Time Close) A short-term loan covers the build, then you apply for a separate mortgage once the home is complete. More flexibility if you want to shop rates after construction, but you’ll pay two sets of closing costs and go through underwriting twice.
How the Draw Schedule Works
Funds aren’t released all at once. Instead, they’re disbursed in scheduled draws tied to construction milestones — foundation complete, framing dried in, mechanicals roughed in, and so on. Before each draw, the lender sends an inspector to verify the work is done.
During construction, interest accrues only on the amount that’s been disbursed, not the full loan balance. This keeps monthly payments manageable while you’re still paying rent or an existing mortgage.
What Lenders Look For
Construction loans carry more scrutiny than traditional mortgages because there’s no finished home to secure the loan against yet. Here’s what lenders typically evaluate:
- Credit score: 680 minimum for most lenders; 720+ gets the best rates
- Down payment: 10–20% of the total project cost (land equity can often count)
- Debt-to-income ratio: Generally needs to be below 43%
- Stable income: Two years of employment history, W-2s, tax returns, pay stubs
- Builder approval: Your builder must be licensed, insured, and approved by the lender
- Project documentation: Signed contract, blueprints, itemized budget, and timeline
That last point surprises many buyers. Your lender needs detailed plans before the loan can close, which means design and engineering work happens before financing is officially in place.
Where to Find Construction Loans in Lebanon County
Start with local and regional lenders, not national banks. Community banks and credit unions make lending decisions in-house, understand local property values, and often have existing relationships with area builders, which speeds things up considerably.
Options worth exploring in Lebanon County and Central PA:
- Lebanon Federal Credit Union — Locally rooted, serving Lebanon County residents across multiple branches
- PSECU — Statewide PA credit union offering one-time-close construction loans with down payments as low as 5%
- New Tripoli Bank — Regional lender offering construction-to-permanent financing with a single closing and rate locked at application
- First Commonwealth Bank — PA-based bank with mortgage teams experienced in construction lending
Also worth noting: established local builders typically have working relationships with lenders who already know their projects and processes. If your builder recommends specific lenders, that’s worth taking seriously. Our team at Alden has worked with several local lenders to help home owners get their project from paper to contruction.
Current Interest Rates
Construction loans carry higher rates than traditional mortgages because lenders are taking on more risk before the home is built. As of late 2025 and into 2026:
- Construction-to-permanent loans: Roughly 6.5–8.0% depending on credit, down payment, and lender
- Construction-only loans: Approximately 6–9% during the build phase
- FHA construction loans: Lower starting rates, but require mortgage insurance premiums for the life of the loan
- VA construction loans: Competitive rates with no down payment requirement for eligible veterans
For context, conventional 30-year fixed mortgage rates were hovering around 6.5–7.25% in late 2025, so construction loans typically run about half a point to a point and a half higher. Rates have declined from their 2023–2024 peaks, and the current environment is more favorable than it was 18–24 months ago.
One strategy worth considering: lock your permanent mortgage rate at the time of your construction loan closing. With a one-time-close loan, this protects you if rates rise during your build window.
A Few Things That Catch Buyers Off Guard
Design fees are out of pocket. Architectural drawings, engineering, and permit costs happen before your loan is in place. Plan for these as upfront expenses.
Cost overruns are your responsibility. If the project runs over budget, the lender isn’t obligated to cover the difference. Build a 10–15% contingency into your budget from the start.
Builder’s risk insurance is required. Standard homeowners insurance doesn’t cover a home under construction. Most lenders require a builder’s risk policy during the build.
Delays affect your loan timeline. Construction loans are typically structured for a 9–12 month build window. Significant delays may require an extension, and some lenders charge fees for this.
Bottom Line: You Can Do This
Building a custom home in Lebanon County is more financially accessible than many people assume. The key is getting the right information early: talk to a local lender before you finalize your plans, understand what the approval process requires, and work with an experienced builder who knows the region.
Ready to explore what’s possible? Contact us to start the conversation.