How to Finance a Custom Home Build in Indiana: Construction Loans Explained
By Michael Mercho ·
Financing a custom home is fundamentally different from getting a mortgage on an existing house. Instead of one loan and one closing, you're dealing with a construction loan, a draw schedule, and a permanent mortgage conversion — often with different rates, requirements, and timelines. Here's how it actually works in Indiana in 2026.
Construction Loans vs. Traditional Mortgages
When you buy an existing home, the bank lends you money against a property that already exists. With a custom build, the property doesn't exist yet — so lenders use a different product called a construction loan.
A construction loan is a short-term loan (typically 12–18 months) that funds the building process in stages called "draws." Your builder submits draw requests as work is completed — foundation, framing, mechanicals, finishes — and the bank releases funds after inspecting the progress. You only pay interest on the amount drawn, not the full loan amount.
In Central Indiana, construction loan rates currently range from 7.0%–8.5%, and most lenders require 20–25% down based on the total project cost (lot + construction).
Construction-to-Permanent Loans
The most popular option for Indiana families is a construction-to-permanent (C2P) loan. This combines the construction loan and permanent mortgage into a single product with one closing. When construction is complete, the loan automatically converts to a traditional 30-year fixed mortgage.
The advantages are significant: you only pay closing costs once, you lock in your permanent rate early (or float with a cap), and the process is simpler than managing two separate loans. Most major Indiana lenders — including First Internet Bank, Merchants Bank, and several credit unions — offer C2P products.
What Lenders Want to See
Custom home lending is more involved than a standard mortgage. Expect lenders to require:
- Detailed construction contract: A fixed-price or guaranteed-maximum-price contract from your builder
- Complete architectural plans: Stamped drawings with specifications
- Builder qualifications: Financial statements, insurance certificates, license verification, and references
- Appraisal: A "subject to completion" appraisal based on your plans and comparable sales
- 20–25% down payment: Based on total project cost, including lot value if you already own the land
How the Draw Schedule Works
A typical custom home build in Hamilton County uses 5–7 draws:
- Draw 1: Foundation complete (15–20% of loan)
- Draw 2: Framing and roof complete (20–25%)
- Draw 3: Mechanicals roughed in — HVAC, plumbing, electrical (15–20%)
- Draw 4: Drywall, insulation, windows installed (10–15%)
- Draw 5: Cabinetry, flooring, trim (15–20%)
- Draw 6: Final finishes, landscaping, punch list (10–15%)
At Integra Builders, we manage the draw process directly with your lender so you don't have to chase paperwork between your bank and subcontractors.
Using Lot Equity as Your Down Payment
If you already own your building lot, most lenders will count its appraised value toward your down payment. For example, if your lot appraises at $250,000 and your total project cost is $1,500,000, you already have roughly 17% equity — reducing the cash you need to bring to closing.
This is one reason we recommend buying your lot early, even before you're ready to build. Land in Carmel, Westfield, and Zionsville continues to appreciate, so your equity grows while you finalize designs.
Tips for a Smooth Financing Process
- Get pre-qualified before you start designing — it sets a realistic budget ceiling
- Choose a lender experienced with custom construction, not just residential mortgages
- Keep large purchases (cars, furniture) off your credit until after closing
- Budget a 5–10% contingency beyond your construction contract for unexpected costs
- Use our Budget Estimator to understand total project costs before meeting with lenders
What credit score do I need for a construction loan in Indiana?
Most Indiana lenders require a minimum credit score of 680–720 for construction loans, though some programs are available at 660. Higher scores (740+) typically qualify for better rates and lower down payment requirements.
Can I use a VA or FHA loan for a custom home build?
VA construction loans exist but are offered by very few lenders and have strict builder requirements. FHA construction loans (FHA 203k) are primarily for renovations, not ground-up custom builds. Conventional construction-to-permanent loans are the most common option for custom homes in Indiana.
How much should I budget for closing costs on a construction loan?
Expect 2–4% of total loan amount for closing costs on a construction-to-permanent loan in Indiana. On a $1.5 million project, that's $30,000–$60,000. This includes origination fees, title insurance, appraisal, and recording fees.