“This article is part of our Colorado construction cost series. For a complete cost breakdown (land, materials, labor, regional differences), see our blog on 2025 Colorado Construction Costs: A Detailed Breakdown.”

Building a home in Colorado can be an exciting journey, but it often presents a significant hurdle: financing. Many homeowners find that traditional mortgages don’t cover the unique costs of a new construction project, leaving them unsure how to pay for land, materials, labor, and permits. Fortunately, construction loans in Colorado are specifically designed to address this issue. In this guide, we’ll explain how these loans work, explore your financing options, outline current interest rates, highlight top lenders, and share practical tips to help you secure the best terms for your build.

What Is a Construction Loan (and Why It’s Different)

A construction loan is a short-term financing product that covers the costs of building a home: land (if not already owned), site work, materials, labor, permits, and soft costs (architectural fees, inspections, etc.).

Key differences vs. a regular mortgage:

Interest-only period during construction:

You typically only pay interest (and sometimes fees) on what has been drawn (disbursed to the builder) during the build period.

Draw schedule/draws:

Funds are released in stages (draws) tied to construction milestones (foundation, framing, roofing, etc.).

Conversion or renewal:

At project completion (or upon issuance of the certificate of occupancy), the loan either converts to a standard mortgage or requires refinancing.

Higher risk/oversight:

Lenders require more oversight (inspections, lien waivers, draw management) during construction.

Shorter term:

The construction period is often 6 to 18 months, depending on the project.

In Colorado, construction loans are commonly structured as construction-to-permanent (aka “C2P”) loans or one-time-close (OTC) construction mortgages. The C2P model means you apply once, then when construction is done, the loan converts into your permanent mortgage; no separate closing is required.

You can learn more about cost drivers (foundation, materials, labor, etc.) in our main post on Colorado Construction Costs here.

How Do Construction Loans Work in Colorado?

Here’s a step-by-step of how a construction loan typically works in Colorado:

Pre-approval & underwriting

You and your builder submit plans, specifications, budgets, and site info. The lender reviews your credit, income, debt-to-income ratio, and the building plan.

Loan closing/initial funding

You close once (in a one-time-close setup) or close two times (construction phase, then permanent). In a one-close, the lender holds back contingency reserves and disburses gradually.

Draws during construction

As work is completed and inspected, the builder submits a draw request. The lender releases funds to the builder. At this time, you pay interest-only on the amount disbursed. (If you draw $150,000 by month 3, you pay interest only on that portion.)

how do construction loans work in colorado

Contingency reserve/holdbacks

Lenders often reserve 5%–10% as a contingency holdback until final completion to protect against cost overruns.

Conversion to permanent financing

When construction is complete, you receive your Certificate of Occupancy (CO) or equivalent, and the lender converts or “rolls” the balance into a permanent mortgage. Your payments switch from interest-only to principal + interest.

Amortization/mortgage phase

The permanent phase is typically a 15-year, 20-year, or 30-year amortizing mortgage based on the borrower’s choice and terms available.

Typical Terms, Rates & Costs (2025 Snapshot)

Below is a current snapshot of what borrowers might expect in Colorado or nationwide (with caveats):

Interest Rate Ranges & Trends

As of early 2025, 30-year construction-to-permanent loan rates generally fall in the 6.9% to 8.2% range nationwide, depending on credit, project risk, and region.
Some lenders quote somewhat lower or higher ranges depending on the loan structure and borrower strength.
Local Colorado lenders are more opaque online about current rates.
One Colorado-based lender, Capital Home Mortgage, lists 6.50% for a 30-year fixed One-Time Close Construction Loan (APR ~7.26%) as of October 2025, noting that borrowers make interest-only payments during the construction phase.
Because construction loans are riskier than standard mortgages, rates tend to carry a premium of 0.5%–1.0% or more above comparable fixed-rate mortgage rates.

Down Payments, Loan-to-Cost & Equity

Many Colorado construction loans will require you to contribute equity (e.g., a down payment) of 20% to 30% of the total project cost.
Some lenders allow you to count the equity in your lot toward the down payment if you already own the land. For example, Community Banks of Colorado will count lot equity toward your equity requirement. They also mention financing up to 80% of the project cost in their construction financing offering.
A few lenders and private construction lenders may push toward 90% financing, but those tend to come with stricter credit and reserve criteria.

Fees & Other Costs

Origination/underwriting fees: 0.5%–2% of the loan amount (or higher for specialized or riskier projects).
Inspection/draw administration fees: For each draw, lenders often charge inspection fees or draw processing fees.
Contingency reserves/holdbacks: Lenders often hold back 5%–10% of the total loan until final completion.
Rate locks: Some lenders allow locking the permanent rate at the time of closing, but lock-in periods might expire if your build overruns.
Interest during construction: You’ll pay interest only on the funds drawn; if you draw slowly, your carrying cost is lower.

In addition to your permits and site preparation expenses (outlined in our Colorado construction cost breakdown blog), lender fees and draw costs can also impact your overall project budget.

Construction Loan Lenders in Colorado (and What to Watch For)

Once you understand your construction costs and project timeline, the next step is choosing the right lender. In Colorado, you’ll find a mix of local banks, credit unions, and regional lenders that offer construction or construction-to-permanent loans. Each has its own approach to draw schedules, rate structures, and conversion options, so it pays to compare carefully.

Below are some well-known institutions active in Colorado’s construction lending space, along with what makes them notable and what you should ask before committing.

Bank of Colorado

Offers construction loans with in-house mortgage conversion. Ask whether they provide a one-time-close option or require separate closings for construction and permanent financing.

Community Banks of Colorado

banks in colorado that do construction loans — *Image courtesy: Greater Glendale Chamber of Commerce*

Allows you to use “lot equity” toward your down payment and finances up to 80% of your project cost. It’s worth confirming which regions or counties they currently serve.

Elevations Credit Union

A trusted local credit union offering construction loans for primary, secondary, and investment properties. Ask about their internal underwriting process, rate locks, and draw schedules.

Pueblo Bank & Trust (PB&T)

Known for local decision-making and short-term draw notes for residential projects. Inquire whether they offer conversion to a permanent mortgage and how their draw schedule works.

Vectra Bank

Provides lot purchase loans and single-close or fixed conversion options for new construction. Confirm which parts of Colorado they serve and whether their one-close program fits your goals.

Colorado Federal Savings Bank

Offers various residential construction lending products. Be sure to clarify draw procedures, rate structures, and whether single-close options are available.

FirstBank

One of Colorado’s largest lenders, offering construction loans for spec homes and pre-sold residential projects. Ask if they support fully custom builds and how the loan converts to a mortgage.

Capital Home Mortgage

Specializes in one-time-close construction mortgages for Colorado homeowners. Look into their lock-in policies, builder approval process, and underwriting timelines.

Westerra Credit Union

Recently introduced a one-time-close construction-to-permanent program for members. Membership eligibility and rate structure are key details to verify.

While national lenders also offer construction loan products in Colorado, local institutions often bring a crucial advantage. They understand regional building conditions, permitting timelines, and the realities of working with Colorado builders. Establishing a relationship with a local lender can make your financing smoother and more predictable.

As we showed in our 2025 Colorado Construction Costs post, the way costs are distributed across each phase directly affects how lenders release draws. When comparing construction loan interest rates, it also helps to review our cost breakdown guide for realistic budget buffers and contingencies.

How to Secure the Best Construction Loan (Tips & Best Practices)

Here are practical tips to increase your chances of getting favorable terms:

Choose a qualified, experienced builder

Lenders are more comfortable with a seasoned builder who has completed similar projects. Provide their portfolio, licenses, and references.

Strong financials & credit

A credit score of 700+ generally improves your chances. Lower-risk borrowers secure better rates and fewer reserves.

Detailed, realistic budgets & plans

Break out your line-by-line cost estimates (materials, labor, and mechanicals). Over-budgeting helps cushion unforeseen costs.

Include contingency reserves

Plan 5%–10% contingency over your estimated cost; lenders often mandate this.

Lock the rate when appropriate

If offered, lock in your permanent mortgage’s interest rate at closing to avoid exposure to rate increases.

construction loan interest rates in colorado

Accelerate draws where possible

If you can complete phases faster, it reduces interest carry costs (you draw more quickly, so less interest on undrawn funds).

Negotiate inspection/draw fees

Ask for flat or capped inspection fees per draw rather than variable or per-man-hour billing.

Use local lenders

Local lenders understand local permitting, geography, and weather risks (e.g., mountain zones). That understanding often helps in approvals and oversight.

Build in buffer time on the schedule

Delays can push you past the lock period or cost more - be conservative in your timeline estimates.

Maintain strong documentation & lien waivers

Lenders will require proof of work, invoices, lien releases, and builder compliance at every stage.

Sample Scenario & Cost Illustration

Let’s run a simplified example to tie cost + financing together (and show how your two blog posts interlink):

Suppose you plan to build a 2,000 sq ft custom home in the Denver metro area, with an estimated total cost of $500/sq ft (i.e. $1,000,000).
Let’s assume you own the lot worth $200,000 and need to finance the rest.

Loan setup:

Component Amount

Total project cost $1,000,000

Less lot equity $200,000

Amount to finance $800,000

Required down equity (25%) $250,000

Lender draws / construction loan $550,000

Permanent mortgage (after build) ~$550,000 (plus any carried interest/fees)

During construction:

Say you draw $100,000 in month 1, $200,000 in month 3, $150,000 in month 6, etc.
Suppose the construction loan interest rate is 7.5% (interest-only). Your monthly interest on funds drawn accrues (e.g., 7.5% × amount drawn / 12).
You pay interest-only during construction, and at completion, roll into a 30-year mortgage (with whatever rate is locked or adjusted).

Frequently Asked Questions

How do construction loans in Colorado differ from those in other states?

Construction loans in Colorado can be a bit different because of the state’s unique landscape and building conditions. From mountain terrains to local permitting rules, lenders here pay extra attention to factors like lot access, soil conditions, and seasonal weather. Working with construction loan lenders in Colorado who know the local area can make the whole process much smoother.

How do construction loans work in Colorado?

A construction loan in Colorado is short-term financing designed to cover all the costs of building your home — land prep, foundation, materials, labor, and finishes. The money is released in stages, called “draws,” as construction milestones are completed. Once your home is finished, the loan often converts into a regular mortgage, either through a one-time-close or two-step process. Understanding how construction loans work in Colorado helps you plan your budget and timeline more realistically.

What are typical construction loan interest rates in Colorado?

Construction loan interest rates in Colorado are generally a little higher than standard mortgages because lenders are taking on more risk. Most borrowers can expect rates about 1–2% above traditional mortgage rates, depending on credit, project type, and lender policies. Checking the latest construction loan rates in Colorado with multiple lenders is always a smart move.

Which banks in Colorado offer construction loans?

There are several banks in Colorado that do construction loans, including local banks and credit unions. Some examples are Bank of Colorado, Community Banks of Colorado, Elevations Credit Union, Vectra Bank, and FirstBank. Local lenders are often easier to work with since they know Colorado permitting rules, inspection processes, and construction timelines better than national banks.

What is the best construction loan in Colorado?

The “best” construction loan in Colorado really depends on your project and personal goals. If you want simplicity, a one-time-close loan, like those offered by Capital Home Mortgage or Westerra Credit Union, is convenient because it combines the construction loan and permanent mortgage into one. For more complex builds, a two-step loan may give you extra flexibility. Compare fees, draw schedules, and rate options to find the right fit.

How much down payment do I need for a construction loan?

Most construction loans in Colorado ask for a down payment of about 20–30% of the total project cost. If you already own your lot, some lenders let you count that land equity toward your down payment, which can reduce the cash you need upfront.

Can land equity be used toward the down payment?

Yes! Many construction loan lenders in Colorado allow you to apply your lot’s equity toward the down payment. So if you already own the land, it can help you meet the lender’s equity requirements - a big help when planning your budget.

What happens if construction is delayed past the rate lock period?

Delays can happen, especially with Colorado weather or permitting holdups. If your project goes past the original rate lock, some lenders may charge a fee or adjust your loan to current construction loan rates in Colorado. It’s always smart to ask your lender about lock extensions before breaking ground.

Does the lender require a contingency reserve?

Yes. Most lenders hold back 5 - 10% of your loan as a contingency reserve. This covers unexpected costs like material price changes or last-minute changes to your build. Planning for this in advance can save stress later.

Risks, Pitfalls & What to Watch Out For

Be transparent in your blog about common risks so readers are well-informed:

Construction delays - Risk of rate lock expiration, increased costs, or requalification.
Cost overruns - Without sufficient contingency or disciplined budgeting, you may hit a funding shortfall.
Builder performance/disputes - Lender might withhold funds if the builder misses milestones or fails inspections.
Permitting / zoning changes - Unexpected changes in code or site conditions can add cost.
Interest carried on undrawn funds - If funds are not drawn quickly, you’re paying a cost to carry capital.
Refinancing risk - If credit or market conditions worsen by the end of the build, your permanent mortgage terms might worsen.

Building Your Colorado Home with Confidence

Financing a home build in Colorado can feel overwhelming, but understanding construction loans in Colorado makes it manageable. By knowing how construction loans work in Colorado, comparing construction loan rates, and choosing local banks or lenders in Colorado that do construction loans, you can plan your budget and timeline effectively.

Preparation is key: work with an experienced builder, plan for contingencies, and keep documentation organized. With the right approach, your dream home can move from blueprint to reality smoothly and confidently.

Financing Options and Construction Loans in Colorado (2025 Guide)