Construction Loan Myths, Debunked

Most of what people “know” about construction loans is wrong. You do not need 20% down for every program, you can build with a VA loan at $0 down, and you do not get the whole loan handed to you at closing. Those misconceptions cost Colorado Springs and El Paso County families real money and real houses every year, because they talk themselves out of building before they ever call a broker. This hub takes the nine most common construction loan myths and matches each one against what the agencies actually publish, so you can plan your Falcon, Peyton, Monument, or Black Forest build on facts instead of folklore.

Every “truth” below is rooted in a primary source: the Fannie Mae Selling Guide, the Freddie Mac Seller/Servicer Guide, HUD Handbook 4000.1, the VA Lender’s Handbook and its circulars, or USDA Handbook HB-1-3555. All figures are general and current as of writing; confirm current terms with a licensed lender before you rely on them.

Myth 1: You need 20 to 25% down for any construction loan

This is the myth that stops the most people, and it is simply not true across the board. The down payment depends entirely on the loan program you use, and the government-backed programs go far below 20%.

• FHA construction-to-permanent: minimum down payment as low as 3.5% for eligible borrowers, the same floor FHA uses on any purchase (general, confirm current).
• VA construction loans: $0 down for eligible Veterans and service members, with no monthly mortgage insurance.
• USDA single-close construction: $0 down in eligible rural areas, up to 100% of the appraised value.
• Conventional single-close: typically higher than the government programs, generally in the 5 to 20% range depending on the file (general, confirm current).

For a Fort Carson family with VA entitlement, or a household buying in a USDA-eligible pocket of eastern El Paso County, the “20% down” number is a phantom. Our fuller breakdown of what each dollar buys lives in the construction loan down payment guide, and the side-by-side of every program sits in the FHA, VA, USDA, and conventional construction loans compared hub.

Myth 2: You cannot build a home with a VA loan

You can. The VA guarantees construction-to-permanent loans, and eligible Veterans can build with $0 down and no monthly mortgage insurance, the same core benefits that apply to a VA purchase. The VA treats a construction loan as a purchase transaction in its systems even when the Veteran already owns the land.

One rule genuinely changed in 2025, and it works in your favor. Through VA Circular 26-25-1, effective March 31, 2025, the VA rescinded the requirement that a builder obtain a VA builder identification number before the Notice of Value on new or proposed construction. Builders must still meet state and local licensing, and the builder ID is still required for Specially Adapted Housing grants and the Native American Direct Loan, but for a standard VA construction loan that old paperwork gate is gone. We cover eligibility, the draw process, and local builder considerations in the VA construction loan in Colorado Springs guide.

Our take: for a Veteran near Fort Carson sitting on a lot in Peyton or Falcon, a VA construction loan is often the single strongest financing available, and the 2025 builder-ID change removes one of the last excuses builders used to steer Veterans elsewhere.

Myth 3: Be your own builder to save money

Owner-builder arrangements sound like a shortcut to savings, but most agency construction programs either forbid them or hedge them tightly, and the “savings” often evaporate against delays, cost overruns, and inspection failures.

• USDA: owner-builders are strictly ineligible. USDA requires a qualified builder with experience, licensing, and liability insurance; you cannot act as your own general contractor on a USDA single-close construction loan.
• FHA: a licensed general contractor is required. A borrower can only self-manage the build if they are themselves a licensed general contractor.
• VA: the Veteran may self-build only in narrow circumstances, and the loan still runs through the same inspection and warranty framework.

In other words, “be your own builder” is not a universal option, and on the $0-down programs most attractive to Colorado Springs buyers it is often the fastest way to disqualify yourself. If you are seriously weighing it, read the honest tradeoffs in our owner-builder construction loan guide first, and know the full construction loan requirements going in.

Myth 4: It is always one loan and one closing

There are two fundamentally different structures, and confusing them leads to nasty surprises. A one-time close (also called single-close or construction-to-permanent) combines the construction loan and the permanent mortgage into a single closing before the build begins. A two-time close uses a separate interim construction loan, then a second closing to refinance into permanent financing when the home is done.

The agencies structure this differently. Fannie Mae offers both single-closing and two-closing transactions; on the single-closing version, the construction period may have no single stretch longer than 12 months and cannot exceed 18 months total. Freddie Mac offers one-time close and two-time close, and for applications received on or after February 4, 2026, all two-time close construction conversion mortgages are delivered as refinance mortgages regardless of whether the borrower owned the land first. Which structure fits your build changes your closing costs, your rate exposure, and your paperwork. We break the whole decision down in one-time close vs. two-time close construction loans.

Myth 5: The rate is locked the entire build

Not necessarily, and assuming it is can burn you. On several programs the interest rate can float during the construction phase, and the mechanics differ by program.

On an FHA construction-to-permanent loan, the rate may float during construction as long as there is a documented ceiling, and the borrower has to qualify at that maximum permanent rate. Some one-time-close conventional and government programs offer a locked rate with an extended lock or a float-down option; others expose you to rate movement until the loan converts. The point is that “locked for the whole build” is a feature you have to confirm, not a default you can assume. Because construction timelines in El Paso County can stretch across months of weather and supply delays, rate-lock terms matter more here than on a standard purchase. We explain float, ceilings, extended locks, and how they price in the construction loan rates guide, and never quote a specific rate, since rates change constantly and are set at the file level.

Myth 6: USDA is only for farms

USDA financing has nothing to do with farming. The USDA Single Family Housing Guaranteed Loan Program helps low- and moderate-income households buy or build a primary residence in eligible rural areas, with income up to 115% of the area median and 100% financing. It is a residential mortgage program, not an agricultural one.

The surprise for a lot of Colorado Springs buyers is the map. Eligibility is about designated rural areas, and parts of eastern and outlying El Paso County, along with towns like Peyton and Calhan, can fall inside USDA-eligible boundaries even though they are a short drive from the city. USDA offers a single-close construction option that is processed as a purchase, with the loan note guarantee issued right after the interim closing, which is unusual among the agencies. See who and where qualifies in our USDA construction loan guide.

Myth 7: The land has to be paid off first

You do not need to own your lot free and clear before you can get a construction loan. Land equity is one of the most useful and most overlooked assets in a construction file, because it can count toward your down payment or reduce the cash you bring to closing.

On the agency programs, the value or cost of land you already own is generally folded into the transaction. FHA looks at land you have owned for more than six months at its appraised value; land owned six months or less is valued at the lesser of cost or appraised value. On a VA construction loan, land equity can count as a down payment and even reduce the funding-fee tier. So if you bought a lot in Black Forest or Monument two years ago, that equity is likely doing real work in your file rather than sitting on the sidelines. The mechanics are in the construction loan down payment guide.

Myth 8: Construction loans are only for custom mansions

Construction financing is not a luxury product. The same programs that finance a large custom build also finance modest, single-family primary residences, and the government-backed options are specifically built for low- and moderate-income households.

USDA exists to help moderate-income rural buyers, capped at 115% of area median income. FHA’s low-down-payment structure is aimed squarely at everyday buyers. VA is designed for Veterans and service members, not a wealth tier. Whether you are building a starter home in Falcon or a right-sized house in Fountain, there is very likely a program scaled to your budget. Our construction loans in Colorado pillar walks through every path from the ground up, and building a home in Colorado Springs covers the local process.

Myth 9: You get all the money at closing

You do not receive the full loan amount as a lump sum at closing. Construction loans fund in stages called draws, released as the build hits milestones and, critically, as inspections confirm the work was actually completed.

The agencies build this in deliberately. On FHA construction-to-permanent, the escrow disburses as construction progresses and the borrower authorizes each draw; a proposed site-built home typically requires either a permit-and-certificate-of-occupancy path or three inspections (footing, framing, and final). On VA and USDA loans, the guarantee or clear inspection status is tied to the build actually reaching completion, and the Veteran or borrower approves the draws along the way. This protects you: money is released against verified progress, not promises. The full sequence, who signs off, and how funds flow is in how construction loan draws work, and the milestone calendar is in the construction loan timeline.

Myths versus reality at a glance

The table below distills the nine myths against the sourced reality. Treat every figure as general and confirm current terms before you rely on them.

The myth	The reality	Primary source
20 to 25% down required	FHA 3.5%, VA and USDA $0 down	HUD 4000.1 / VA Handbook / USDA HB-1-3555
Cannot build with a VA loan	VA construction, $0 down, no monthly MI	VA Lender’s Handbook, Ch. 7
Be your own builder to save	USDA bans owner-builders; FHA needs a licensed GC	USDA HB-1-3555 / HUD 4000.1
All money arrives at closing	Funds release in draws, tied to inspections	HUD 4000.1 draw and inspection rules

If a builder, a forum post, or a well-meaning relative tells you something about construction loans that contradicts the table above, check it against the agency source or ask a licensed mortgage broker in Colorado Springs before you let it change your plans. A broker can pull your specific numbers and tell you which of these programs your lot, budget, and credit actually open up.

Frequently asked questions

Do I really need 20% down to build a house in Colorado Springs? No. FHA construction-to-permanent loans start as low as 3.5% down, and eligible VA and USDA construction loans can require $0 down. Conventional construction typically asks for more, but 20% is not a universal requirement. Figures are general; confirm current terms with a lender.

Can a Veteran build a new home with a VA loan? Yes. The VA guarantees construction-to-permanent loans with $0 down and no monthly mortgage insurance for eligible Veterans. As of VA Circular 26-25-1, effective March 31, 2025, builders no longer need a VA builder identification number for the Notice of Value on standard new construction, though state and local licensing still applies.

Is USDA financing only for farms or agricultural property? No. The USDA Single Family Housing Guaranteed Loan Program finances primary residences for low- and moderate-income households in eligible rural areas, not farms. Parts of outlying El Paso County can qualify. Household income generally must not exceed 115% of the area median.

Do I get the full construction loan amount at closing? No. Construction loans fund in draws released as the build reaches milestones and passes inspections. On FHA loans the escrow disburses as construction progresses and you authorize each draw, which protects you by tying money to verified work.

Does my land have to be paid off before I can get a construction loan? No. Land you already own generally counts in the transaction, and existing land equity can reduce your down payment or, on a VA loan, help lower your funding-fee tier. You do not need a free-and-clear lot to start.

Is the interest rate locked for the entire construction period? Not always. On some programs, including FHA construction-to-permanent, the rate can float during construction with a documented ceiling, and you qualify at that maximum rate. Others offer extended locks or float-down options. Confirm your specific lock terms, since rates change constantly.

719 Lending, NMLS #1601989. Equal Housing Opportunity. 719 Lending is not affiliated with or endorsed by the FHA, VA, USDA, or any government agency. All figures and program details are general, confirm current, and subject to change; this is educational information, not a commitment to lend, a rate quote, or a guarantee of approval. Last updated: July 2026.