Housing Construction Financing

While having the exact home you want is a tremendous benefit, financing the construction of a home may be a different matter. If you’re working with a custom builder, you’ll need to take on something known as a “build loan.” This is the loan you pay back to the builder while you build your home. Construction loans are usually short-term loans that have a higher interest rate than your traditional mortgage.

If you’re buying a starter home, luckily this might not apply to you. “Start-up home” builders understand that many of their potential buyers may not qualify for a high-rate construction loan nor do they understand or care about acquiring a short-term loan and then a long-term loan. For this reason, entry level homes are often financed by the builder or the builder simply builds the homes out of pocket, managing the lot and all construction costs for the home. If this is the case with your builder, you won’t need anything more than a traditional loan.

If it turns out that you’ll need home construction financing, it’s definitely worth shopping around for the best rates and the lender to get one with. Since construction loans are generally set at a higher rate than conventional home loans, you’ll want to pay off your construction loan as soon as possible.

Some banks will offer you a package called a “combination cyp” loan with only one set of closing costs. This is both a construction loan and a conventional home loan rolled into one. A combination loan from C&P will save you time and hassle in the long run.

Traditionally, a construction loan works as follows. Apply through a lender for a construction loan secured by the house that is being built. Because the house is not built yet, the lender is taking on additional risk in financing it and this will be reflected in your rates.

As the home is built, the builder will request a “draw” or percentage of the cost based on the level of completion of the home. This will occur at various stages during the construction of your new home. The bank that is financing your construction loan will compensate the builder for these draws and the construction will advance to the next stage.

Around thirty days before the house is complete, you’ll want to apply for a traditional mortgage contingent on the house being complete. This way, the construction loan is paid off and permanent financing is set up as quickly as possible after the home is built.