Financing

Since most people don’t have cash on hand to finance building a new home, you will most likely need to obtain a Construction Loan.

Money from a Construction Loan is typically released in three or four stages throughout the construction process, and most only require you to pay the interest while your new home is being built. Once you have a certificate of occupancy, the Construction Loan will need to be repaid, or converted into a mortgage loan.

Before a lender will approve a Construction Loan, they will need to know everything about the home. You will need to provide blueprints, information on materials, labor, and all other costs associated with the construction process. They will also need to understand the construction timeline, including when the home will be ready for possession and occupancy by the owner.

The lender and builder will set a withdrawal schedule, allowing the builder and contractor to draw money on the loan for each stage of construction. Typically, interest is only applied and payable for the amount of money currently withdrawn on the loan.

Many lenders offer a Construction-to-Permanent financing option, where a Construction Loan is switched to a standard mortgage loan after the home is completed. The advantage to this plan is that you will only have to submit one loan application. Sometimes lenders will offer better mortgage terms or longer rate lock if you’re willing to pay higher rates on the initial Construction Loan, so make sure you understand all your options.

Like a traditional home mortgage, how much you can borrow will depend on your credit rating, financial status, income and available collateral. Sometimes, building your own home can actually cost less than buying a resale home, since Construction Loans are typically cheaper than mortgages. Building a new home can be a great investment.

It’s important to compare and shop multiple lenders when you’re looking for a Construction Loan to build your new home. Carefully consider all your options and do your research. It’s a good idea to consult a Construction Mortgage specialist, who will be able to answer specific questions about Construction Loans and how they work.