Financing a new home is not the same as financing a resale home. The process has extra steps, extra paperwork, and a few extra risks. But once you understand the structure, it is very manageable, especially if you work with a lender and builder who have done it before.
For move-up buyers, the biggest adjustment is usually the timing. With a resale home, you close once and move in. With new construction, you often close twice in a sense: first on the construction loan, then on the permanent mortgage.
Construction loans vs. traditional mortgages
A construction loan is a short-term loan that covers the cost of building the home. It is usually interest-only during construction, and you draw money in stages as the work progresses. Once the home is complete and passes final inspection, the construction loan is converted or replaced by a permanent mortgage, often called a construction-to-permanent loan.
Some lenders offer a single-close construction-to-permanent loan, which simplifies the process. Others require two separate closings, which means two sets of closing costs. Ask your lender to walk you through both options.
What lenders look for
Lenders want to see a complete plan before they approve a construction loan. That includes the purchase contract or deed for the lot, signed construction contract, detailed plans and specifications, builder credentials, and a realistic budget.
The builder’s reputation matters. Lenders are more comfortable financing a project when the builder is established, licensed, insured, and has a track record of completing homes on budget. Many lenders specifically prefer or require builders who are members of a local home builders association.
Down payments and reserves
Construction loans often require larger down payments than traditional mortgages, sometimes 10 to 20 percent. Lenders also want to see that you have cash reserves beyond the down payment, because unexpected costs or delays can happen.
Do not drain your savings completely to get the loan. Keep a buffer for life’s normal expenses plus the inevitable surprises of a construction project.
Rate locks and timing
Interest rates can change during the months it takes to build your home. Some lenders offer extended rate locks, but they may come with fees. Others allow you to float the rate until closer to completion. Talk through the options with your lender and understand the costs and trade-offs.
Make sure your builder and lender are aligned
Your builder will need to submit draw requests and documentation to the lender at different stages of construction. If the builder is slow to provide paperwork or unfamiliar with the lender’s process, your project can stall. Ask both parties early about how they communicate and what they need from each other.
A builder who is an HBA Dayton member is likely to have experience with local lenders and the construction loan process. That experience can save you time and stress.
Read the fine print
Before you sign anything, make sure you understand how the loan handles cost overruns, change orders, and delays. Ask what happens if the project goes over budget or takes longer than expected. A good lender and a good builder will both be willing to explain these scenarios clearly.
Financing is the engine that keeps the project moving. Get it right at the start, and the rest of the build is much easier.
Ready to build with confidence?
An HBA Dayton member builder can guide you through every step of your new home project. Start with a trusted, local professional.