What to Do When Your Construction Loan Runs Out Before the Project Is Done

When the Money Runs Out Before the House Is Done

You are partway through building your custom home. The framing is up, maybe the roof is on, electrical rough-in is complete. Then your builder submits the next draw request and your lender informs you that the remaining loan balance will not cover the work left to finish the project.

This is one of the most stressful moments in any homeowner’s building experience. You are financially committed, the structure is partially complete, and stopping work creates its own set of problems: an unfinished building exposed to weather, ongoing interest payments on a loan secured by a property that is not livable, and a contractor who may move on to other projects.

The situation is serious, but it is not hopeless. There are practical steps you can take, options for additional financing, and strategies for bringing the project to completion. This guide walks you through all of them.

We are not tax professionals. Consult a CPA or tax advisor for guidance specific to your situation.

Why Construction Loans Run Short

Understanding why you are in this situation helps you address the root cause and prevent it from getting worse.

Scope Changes During Construction

This is the most common cause. You started with a plan and a budget, but as the project progressed, you made changes. An upgraded kitchen appliance package here, an additional bathroom fixture there, a decision to add built-in cabinetry that was not in the original plans. Each individual change may seem modest, but they accumulate quickly.

In custom home construction, scope changes (also called change orders) are normal. The problem arises when the cumulative cost of those changes is not tracked against the remaining loan balance. By the time someone does the math, the budget is gone.

Construction Delays

Time is money in construction, and delays cost both. Extended project timelines mean additional months of interest payments on the construction loan, extended general conditions costs (site supervision, portable facilities, insurance, utilities), and potential material price increases if you need to reorder items.

Common causes of delay include permit processing backlogs, weather, material supply chain issues, subcontractor scheduling conflicts, and inspection failures that require rework.

Underestimated Original Budget

Some projects start with a budget that was too optimistic from the beginning. Maybe the estimate was based on incomplete plans. Maybe costs were based on national averages rather than Bay Area pricing. Maybe certain line items were omitted from the original budget: site work, utility connections, landscaping, or permit fees.

When the original budget is 15% to 20% below the actual cost of the work, the loan runs dry well before the project is complete.

Insufficient Contingency

A construction budget without an adequate contingency is a budget designed to fail. Custom home projects inevitably encounter conditions or decisions that were not anticipated in the original plans. Without a financial cushion, any surprise becomes a crisis.

Geotechnical or Site Surprises

Unexpected soil conditions, rock, hidden utilities, or drainage issues discovered during construction can add tens of thousands of dollars to the foundation and site work costs. These costs come out of the overall budget and reduce what is available for the rest of the project.

What to Do: Your Options

Option 1: Loan Modification or Extension

Your first call should be to your lender. Construction lenders understand that projects sometimes exceed their original budget and timeline. Most have established processes for handling this situation.

Loan extension: If the budget is adequate but the timeline has slipped, a loan extension gives you more time to complete the project. Most lenders offer extensions in three-month increments, with fees of 0.25% to 0.50% of the loan amount per extension.

Loan increase: If you need additional funds, the lender may agree to increase the loan amount. This requires a new appraisal of the property (based on its projected completed value), verification that your income and credit still qualify, and the lender’s confidence that the additional funds will bring the project to completion.

Rate adjustment: In some cases, you may be able to renegotiate the interest rate as part of a loan modification, especially if market rates have changed since the original loan was originated.

Option 2: Bridge Financing

If your primary lender cannot or will not increase the loan, bridge financing from a private or alternative lender may be an option. Bridge loans are short-term (typically 6 to 18 months), carry higher interest rates than conventional construction loans, and are secured by the property.

Bridge financing is expensive, but it can provide the funds needed to finish the project and convert to a permanent mortgage. The cost of bridge financing is almost always less than the cost of leaving the project unfinished.

Option 3: Personal Funds

If you have savings, investment accounts, or other liquid assets, using personal funds to cover the gap may be the simplest solution. This avoids additional borrowing costs and the delays associated with securing new financing.

Consider the tax implications of liquidating investments. Consult with a tax advisor before making large withdrawals from retirement accounts or selling securities.

Option 4: Value Engineering the Remaining Work

If additional financing is not available or desirable, work with your builder to identify ways to reduce the cost of the remaining work without compromising the structural integrity or habitability of the home.

Value engineering options include:

• Downgrading finishes: Switching from natural stone countertops to quartz, from hardwood flooring to engineered wood, or from custom cabinetry to semi-custom
• Deferring non-essential items: Landscaping, irrigation systems, outdoor living spaces, and secondary bathrooms can sometimes be completed after move-in with separate funding
• Simplifying design elements: Eliminating or simplifying architectural details like coffered ceilings, custom millwork, or decorative stonework
• Renegotiating material purchases: Your builder may be able to source equivalent materials at lower cost if given flexibility on brand or supplier

Option 5: Pause and Reassess

In some cases, the best decision is to pause construction temporarily while you secure additional funding or reassess the project scope. This is not ideal, but it is better than continuing to spend money you do not have.

If you pause construction:

• Ensure the structure is weatherproofed (roof on, windows installed, openings sealed)
• Maintain insurance coverage on the property and the partially completed structure
• Continue making loan payments to avoid default
• Communicate your plan and timeline to the lender and the builder
• Understand that your builder may not be available to resume work immediately when you are ready to restart

Communicating with Your Lender

How you communicate with your lender matters as much as what you communicate.

Be Proactive

Contact your lender as soon as you see the shortfall developing. Do not wait until the last draw request is denied. Lenders respond much better to borrowers who identify problems early and come with a plan.

Come Prepared

When you contact the lender, have the following information ready:

• A current cost-to-complete estimate from your builder
• A revised project timeline
• An explanation of why the budget was exceeded
• A proposed solution (loan extension, increase, or combination)
• Documentation of the work completed to date

Stay Professional

Even if the situation is frustrating, maintain a professional and cooperative tone. The loan officer managing your file has the authority to recommend solutions or escalate your case within the lending institution. Antagonizing them reduces your options.

How to Prevent This Situation

Get Detailed Pricing Before You Break Ground

The most effective prevention strategy is having a locked-in, detailed construction price before the first shovel hits dirt. Vague estimates, allowances without supporting selections, and “ballpark” numbers are the foundation (pun intended) of budget overruns.

A detailed construction price should include every line item: materials, labor, subcontractor costs, permit fees, utility connections, site work, and general conditions. It should also clearly identify what is included and what is not.

Build in a Real Contingency

Carry a contingency of 10% to 15% of the total construction cost for custom homes. This money is not a slush fund for upgrades. It is insurance against the unknown: soil surprises, material price spikes, code requirements that emerge during inspection, and the dozen other things that no one can predict at the start of a project.

Track Change Orders in Real Time

Every change order should include a cost, a timeline impact, and a running tally of the total change order budget consumed. This tracking should happen in real time, not in a quarterly reconciliation. When you can see the cumulative cost of your changes at any moment, you make better decisions about each individual change.

Align Loan Draws with Construction Progress

Work with your lender and builder to ensure that the draw schedule matches the actual pace of construction. Front-loading draws (taking too much money early) leaves insufficient funds for the expensive finish work at the end. A well-structured draw schedule releases funds proportional to the work completed at each stage.

How the Design-Build Model Prevents Budget Surprises

At Custom Home Design and Build, our Phase 1 process is specifically designed to prevent the scenario described in this article. Before construction begins, we complete a thorough design phase that includes:

• Full architectural plans with all details resolved
• Material and finish selections made and priced
• A detailed construction cost based on actual plans and actual material choices, not estimates or allowances
• A geotechnical investigation and site evaluation
• A realistic project timeline

This Phase 1 pricing process gives homeowners and their lenders a construction cost they can rely on. When the loan is structured around a detailed, locked-in price rather than a rough estimate, the risk of running out of funds drops significantly.

Change orders still happen on design-build projects. Homeowners change their minds, and unexpected conditions occur. But because the base price is accurate and the contingency is real, these changes rarely threaten the overall project budget.

Finish What You Started

Running out of construction loan funds is a setback, not a dead end. Your options are real and actionable: loan modification, bridge financing, value engineering, or a temporary pause. The key is acting quickly, communicating honestly with your lender, and working with your builder to find the most cost-effective path to completion.

If you are planning a custom home in the Bay Area and want to start with a budget you can trust, contact Custom Home Design and Build. Our Phase 1 design and pricing process ensures that you and your lender know the real cost of your project before construction begins.