Construction Loan and Home Builder Glossary: Key Terms in Plain English

Building a home comes with its own vocabulary, and a few of these words decide how much you'll pay and who carries the risk when something changes. These are the terms we use every day when we help borrowers choose a builder and finance a build with a one-time close construction loan. Each definition is short. Where we've written a deeper guide, we link to it.

Jump to: Builders and home types · Contracts and pricing · The loan · Paying the builder · Insurance · Finishing and warranty

Choosing a builder? Start with our guide to choosing a builder, then use this page as your reference.

Builders and home types

Production builder

A production builder builds many homes from a set menu of floor plans, usually on lots the builder owns in its own neighborhoods. Because the same plans are built again and again, pricing tends to be tighter and more predictable. The trade-off is that your choices are limited to the builder's list of options. Production builders are also called tract or volume builders.

Semi-custom builder

A semi-custom builder starts from its own library of plans and lets you modify them: moving a wall, adding a room, changing finishes. You get more flexibility than a production builder offers, with fewer pricing unknowns than a full custom build. Many semi-custom builders will also build on your lot.

Custom builder

A custom builder builds a one-of-a-kind home to your design, from plans you bring (often from an architect or designer) or plans drawn for you. Custom building offers the most freedom and the most room for pricing surprises, so detailed specifications and realistic allowances matter most here.

Spec home

A spec home (short for "speculative") is a home a builder starts before it has a buyer, planning to sell it during or after construction. The builder usually carries the construction financing, and the buyer closes on a regular purchase loan once the home is finished. You get fewer choices, but a simpler path than a construction loan.

Building on your own lot

Building on your own lot means a builder constructs your home on land you already own or are buying, rather than in the builder's own neighborhood. With a one-time close loan, buying the land (or paying it off) and building the home can be wrapped into one loan with one closing. Site work and utilities become part of your project's budget, which is why we recommend choosing your builder before you buy land.

Learn more: Why You Should Choose a Builder Before Buying Land

General contractor and subcontractors

The general contractor is the company that signs your construction contract and is responsible for the whole job. On a new home, that's your builder. Subcontractors ("subs") are the trades the builder hires for specific work, such as the foundation, framing, plumbing, electrical, and HVAC. Your contract is with the builder, but an unpaid sub or supplier may still be able to file a lien on your property, which is why lien waivers matter.

Owner-builder

An owner-builder is a homeowner who acts as their own general contractor instead of hiring a builder. We don't finance owner-builder projects on any of our loan programs; every build we finance needs a builder that's registered with us.

Contracts and pricing

Fixed-price contract

A fixed-price contract, also called a lump-sum or stipulated-sum contract, sets one total price for the work described in your plans and specifications. If the builder's costs come in higher, the builder absorbs the difference. The exceptions are changes you approve and selections that go over their allowances. A fixed price is only as firm as the plans, specs, and allowances behind it, so read what's excluded. Every construction loan we make requires one.

Cost-plus contract

A cost-plus contract has you pay the builder's actual costs for labor and materials, plus a fee that's either a set amount or a percentage of those costs. When the fee is a set amount, it's sometimes called a fixed-fee contract. It's transparent and flexible, but you won't know the final price up front unless the contract adds a guaranteed maximum price (GMP), a ceiling the builder can't exceed without approved changes. Because a construction loan amount is set at closing, we don't finance cost-plus contracts; our loans require a fixed price.

Turnkey

A turnkey home is one the builder delivers complete and ready to live in. Everything from raw land to a finished, livable home is in the price, including site work, utility connections, septic or sewer, well or water service, the driveway, permits, and final cleanup, so you can "turn the key" and move in. Turnkey describes what's included, not how you pay. All of our construction loans require a contract that's both turnkey and fixed-price. That's our own program requirement, not a government rule, and it keeps the full cost of finishing your home inside the price you agreed to.

Fixed price vs. turnkey: what's the difference?

Fixed price answers "how will I pay?": one agreed total. Turnkey answers "what am I getting?": everything needed to move in. Because they answer different questions, a contract can be one, both, or neither. A fixed-price contract that leaves out the driveway, septic system, and utility hookups isn't turnkey. A turnkey home built on a cost-plus contract has no firm price.

Escalation clause

An escalation clause lets the builder raise the contract price if certain costs, such as lumber or other materials, go up before or during construction. It can quietly turn a fixed price into a moving one. Ask whether your contract has one, what triggers it, and whether there's a cap. We discourage escalation clauses, though we understand why builders use them when material prices swing. If your contract has one, that's one of the best reasons to build a contingency into your loan, because the loan amount can't go up after closing.

Allowance

An allowance is a dollar amount the contract sets aside for items you haven't chosen yet, such as flooring, cabinets, countertops, lighting, or appliances. If your selections cost more than the allowance, you pay the difference, usually through a change order. If they cost less, your contract may give you a credit. We don't encourage allowances: the more selections you make before you sign, the more final your price is. If a few remain, make sure each one fits your plan and your taste, not copied from another job, and compare it with a real quote.

Change order

A change order is a written, signed amendment to your construction contract that changes the work, the price, the schedule, or all three. Every change, even a small one, should be on a signed change order before the work is done. Once plans are engineered and permitted, even a minor change can mean redrawing, re-engineering, and new approvals from the building department or homeowners association, all of which cost time and money. After a construction loan closes, the loan amount can't be increased, so added costs are generally paid out of pocket or, if approved, from your contingency.

Learn more: Understanding the Construction Loan Draw Process

Plans and specifications

Plans are the drawings of your home: floor plans, exterior elevations, and construction details. Specifications ("specs") are the written description of the materials, products, and methods the builder will use, from insulation and windows to HVAC and finishes. Together they define exactly what your contract price buys, and your lender and appraiser use them to value the home before it's built. The more complete they are, the more accurate your price and the fewer change orders you'll face later. For VA loans, the plans need to include wall section details.

Learn more: Are VA Construction Loans Really Harder for Builders?

Description of Materials

A Description of Materials is a standard form on which the builder lists the materials and equipment for a home that hasn't been built yet, section by section. On FHA, VA, and USDA construction loans, we collect one from the builder, and it serves as the written specifications the appraiser relies on. VA's version is VA Form 26-1852. A builder who has priced a job carefully should be able to complete it without trouble.

Cost breakdown

A cost breakdown, sometimes called a budget or schedule of values, itemizes the contract price by category of work: site work, foundation, framing, roofing, mechanical systems, cabinets, and so on. Lenders use it to confirm the budget is complete and to release draws as each line item is finished. Ours runs about 40 line items.

Learn more: Understanding the Construction Loan Draw Process

The loan: approval and closing

Builder registration

Builder registration is a lender's review and approval of your builder before a construction loan can close. Each lender runs its own process. Ours collects:

• the builder's company and ownership information
• project history
• vendor, trade, and financial references
• a contractor license, where the state requires one
• general liability and workers' compensation insurance
• financial statements, for builders of site-built homes

Once we have the full packet, the review typically takes just a few business days.

For builders: Partner with us

VA builder ID

A VA builder ID is an identification number VA used to issue to builders of new homes sold with VA-guaranteed loans. VA dropped that requirement on March 31, 2025, so a builder no longer needs a VA builder ID for a VA construction loan or a new-home purchase. It's still used for VA's Specially Adapted Housing grants and Native American Direct Loans. Builders still have to meet any state or local licensing rules, and lenders still run their own builder registration.

One-time close loan (construction-to-permanent)

A one-time close loan, also called a construction-to-permanent or single-close loan, covers the land (if needed) and the construction, then becomes your long-term mortgage when the home is finished, with one application and one closing. VA, FHA, USDA, and conventional versions exist. Construction loans like these have always been our team's specialty.

Learn more: Construction loans · VA construction loans

Two-time close loan

A two-time close uses two separate loans: a short-term construction loan to build the home, then a permanent mortgage that pays it off when the home is finished. That means two approvals and two closings, and you'll need to qualify again for the second loan.

Construction-to-permanent conversion

Conversion is the point when a one-time close loan moves from the construction phase to your permanent mortgage. It happens after the home is finished, the final inspection is done, and the final draw is paid. There's no second closing. If any contingency funds go unused, they're applied to your loan's principal.

As-completed appraisal (subject to completion)

An as-completed appraisal, which appraisers mark as "subject to completion," values your home as it will be when it's finished, based on the plans, specifications, cost breakdown, and lot, before construction starts. When the home is done, the appraiser comes back to confirm it was built as appraised, usually on Fannie Mae Form 1004D, the Appraisal Update and/or Completion Report.

Contingency

A contingency is extra money built into your construction budget to cover costs no one planned for, such as price increases, extra site work, or rework. Once a one-time close loan closes, the loan amount can't be increased, so the contingency is your buffer. We don't require one, but we strongly recommend it. Any unused contingency is applied to your loan principal. Some builders also build a contingency into their own price; ask whether yours does, so you know what each one covers.

Learn more: Include a Contingency in Your Construction Loan

Construction interest

Construction interest is the interest that builds up on the money paid out while your home is under construction. Lenders handle it in different ways:

• you pay it monthly
• an interest reserve set aside in the loan covers it
• the builder covers it under the contract

How it's handled affects your cash flow during the build, so ask before you choose a lender.

Learn more: Who Pays the Interest During Construction?

Paying the builder during construction

Draw

A draw is a release of loan funds to pay the builder for work that's been completed. Construction loans pay out in a series of draws instead of one lump sum, so the builder is paid as the home takes shape, not in advance.

Learn more: Understanding the Construction Loan Draw Process

Draw schedule

A draw schedule is the plan for when and how construction funds are released. Some lenders pay set amounts at set stages, such as foundation, framing, and dry-in. We pay by the percentage completed on each line of the cost breakdown, and the builder can request a draw at any point. Either way, a builder has to be able to pay subs and suppliers between draws.

Draw inspection

A draw inspection is a site visit by a third-party inspector, ordered by the lender, to confirm how much of each line item is complete before a draw is paid. You sign off on each draw before funds are released. A draw inspection protects the loan funds; it isn't a code inspection or a home inspection, so consider hiring your own inspector at key stages.

Retainage

Retainage, also called retention, is part of each payment that's held back until the job is finished, to make sure the work gets completed and the subs and suppliers get paid. Our draws don't hold back retainage; we pay by the percentage of work completed. Some states' lien laws can still put a holdback duty on the owner (Texas is one), so if you're building in one of those states, ask your title company or a real estate attorney how it applies to your build.

Mechanic's lien

A mechanic's lien (in some states, a materialman's or construction lien) is a legal claim against your property by a contractor, subcontractor, or supplier who wasn't paid for work or materials. In many cases a lien can be filed even if you paid your builder in full but the builder didn't pay them. Liens can cloud your title and hold up the end of your loan, which is why lien waivers matter. Texas adds extra protection for homesteads: the building contract must be in writing and signed before any work starts, by both spouses if you're married.

Lien waiver

A lien waiver, or lien release, is a signed document in which a contractor, subcontractor, or supplier gives up its right to file a lien for a payment.

• Conditional waiver: takes effect only once the payment actually reaches them.
• Unconditional waiver: takes effect as soon as it's signed, so it should be signed and accepted only after the money is received.

Waivers come in progress-payment and final-payment versions. Several states, including Texas, California, and Arizona, require specific statutory forms. In Texas, a waiver counts only if it substantially follows one of the four forms in the Property Code, and no one can demand an unconditional waiver until the payment has actually been received.

Site work

Site work is everything done to prepare your lot and connect the home:

• clearing, grading, and dirt work
• the building pad
• the driveway and culverts
• drainage
• utilities such as water or a well, septic or sewer, and electric

It's one of the biggest variables when you build on your own lot. On a turnkey contract, which our loans require, all of it is part of the price, so make sure your contract spells out the site work it includes.

Learn more: Why You Should Choose a Builder Before Buying Land

Building permit

A building permit is approval from your local building authority (the city or county) to build, and it usually comes with inspections at set stages, typically the foundation, framing, and final. Rules vary widely, and some rural areas have no building inspections at all, which can change what your lender needs before the final draw. (For VA loans, a home built without local inspections also needs a 10-year insured warranty.) Your builder should pull the permits in the builder's own name.

Insurance

Builder's risk insurance

Builder's risk insurance covers a home while it's being built: damage to the structure and the materials on site from events such as fire, windstorm, theft, and vandalism. Your contract should say who buys it, you or the builder. We accept either, as long as the policy is in place for the whole build and names us under a loss payee clause, so a claim payment protects the loan as well as you. Coverage ends when the home is complete and your homeowners insurance takes over.

General liability insurance

General liability insurance protects the builder if its work or crews injure someone or damage someone else's property. Ask for a certificate of insurance and check the limits and expiration date. We require it to register a builder.

Workers' compensation insurance

Workers' compensation insurance covers medical care and lost wages for workers hurt on the job. We require it when we register a builder, unless the state doesn't, as with a builder that has no employees. Texas is unusual: most private employers there can choose not to carry it (they're called "non-subscribers"). Ask a Texas builder directly whether they carry it and how their subcontractors are covered.

Certificate of insurance

A certificate of insurance (COI) is a one-page summary, issued by the builder's insurance agent, that lists the builder's policies, coverage limits, and dates. Ask the agent to send it to you or your lender directly, rather than accepting a copy from the builder, and check that the coverage runs through your build.

Finishing and warranty

Substantial completion

Substantial completion is the point when the home is finished enough to be used for its purpose, usually when you can move in, even if a few punch-list items remain. Many contracts tie the final payment, the start of the warranty, and any late-completion terms to this date, so read how your contract defines it.

Certificate of occupancy

A certificate of occupancy (CO) is the document a local building authority issues once a new home passes its final inspection and is approved to be lived in. Lenders generally need it before the final draw, or an accepted alternative where no local authority issues one.

Homeowner orientation (final walk-through)

A homeowner orientation, often called the final walk-through, is a meeting at your finished home where the builder shows you how its systems work and you confirm everything you selected was installed. It happens before you move in; with a one-time close loan, that's before the final draw. The National Association of Home Builders' homebuyer guide suggests setting aside at least two hours, avoiding late-afternoon glare that hides flaws, and reading your warranty first. Signing the orientation forms usually confirms that cosmetic surfaces are in good condition, so note every scratch or chip before you sign.

Punch list

A punch list is the list of small items still to fix or finish, such as paint touch-ups, a sticking door, or missing trim. It's usually written during the homeowner orientation. Get it in writing with a completion date, and know how it ties to the final payment.

Builder warranty

A builder warranty is the builder's written promise to fix defects for set periods after you move in. A structure used by many third-party warranty programs is "1-2-10":

• 1 year for workmanship and materials
• 2 years for systems such as plumbing, electrical, and HVAC
• 10 years for major structural defects

Get the warranty in writing before you sign, and ask how to report problems and how fast they're handled. It's also worth asking whether the builder measures warranty claims against the National Association of Home Builders' Residential Construction Performance Guidelines, NAHB's benchmark for what counts as a defect.

For FHA and VA loans: the builder also signs a one-year Warranty of Completion of Construction (form HUD-92544, the same form as VA Form 26-1859). It covers building to the approved plans and specs, and defects in equipment, material, and workmanship. On VA loans, note that since 2025 VA no longer steps in on complaints about builders, so the builder's own warranty and track record matter even more.

10-year insured warranty

A 10-year insured warranty (also called a structural warranty plan) is backed by an insurance company rather than by the builder alone, so coverage for major structural defects can continue even if the builder goes out of business. Many builders offer one through a third-party warranty company. For VA loans, it's required when the local authority didn't inspect the home during construction.

Choosing a builder now? Send us your builder's name and we'll tell you whether they're already registered with us and what registration takes. Talk with our team →