Securing financing is probably the least exciting part of building a custom home, but, of course, it’s an essential part of the process. If you’re planning to build, there are some important things to know about construction financing and how it works.
Three common types of construction loans are:
- Construction-to-permanent loans - These loans are desirable, but they can be more difficult than other types to secure. A temporary construction loan is issued, usually for a period of 12 months, then the loan is converted to traditional mortgage when a certificate of occupancy has been issued. During construction, interest-only payments are made. These loans are ideal because there’s only one closing, and only one set of closing costs, unlike other types of loans.
- Construction-only loans - These finance the project only while construction is ongoing. Monthly interest is paid on the loan funds that have been disbursed. During the construction part of the process, these loans are identical to construction-to-permanent loans; the difference is what happens after. When construction wraps up, the borrowers applies for a mortgage on the property (either with that lender or a different lender). The downside to this is there are two separate closings and two separate closing costs.
- Lot loans - While your custom home is being designed, you might want to go ahead and buy a piece of land. A lot loan will finance that purchase until your plans are solidified and you obtain a construction loan.
Many clients seek pre-approvals before meeting with us to find out how much house they can finance, and that’s fine. If you’d rather meet with us first to discuss options and then approach the bank to discuss financing, that’s fine, too.