New Home Construction: Loan Explained

by Courtney Christensen

Building a new home comes with weeks and months of planning – even before ground is broken. When you’re thinking about building your own home, your mortgage options can sometimes be overshadowed by blueprints and flooring choices. When the excitement slows down, but before you being choosing the perfect lot, take some time to research the financing available to you.

The Basics

A New Home Construction loan was created for people who want to build their home from the ground up. Unlike Renovation loans or government-backed loans, which can have long lists of requirements related directly to the home itself, New Home Construction loans allow you the freedom to decide how to build a home you’ll love.

Construction loans allow for payment of the builders and contractors to be paid by your lender. This way, payments are always on time and always in-full. Plus, you don’t have to pay anything out of pocket towards the multiple contractors you will be working with on the construction of your home.

There are two types of construction loans: One-Time and Two-Time Construction loans. Both have their pros and cons, but it’s up to you and your lender to decide which loan is going to work best for your situation.

Who Qualifies for this Loan?

Similarly to Conventional loans, New Home Construction loans have less-flexible requirements than government-backed loans like FHA or USDA loans. You should be prepared for a down payment, though the amount could differ based on which construction loan you choose. Your credit should be good, and your debt-to-income ratio should be low.

How Do New Home Construction Loans Work?

Like I mentioned earlier, there are two types of construction loans. However, there are plenty of similarities. For instance, you won’t owe any interest payments until after the construction is over. Qualifications for each type are also similar which means you are choosing a loan type based on preference – not necessity.

One-Time Construction

  • Combines your construction financing with your permanent home mortgage
  • One approval process with one set of closing costs
  • 10% down payment minimum
  • Choose between 6 or 9 month construction loan term

Two-Time Construction

  • Separates construction financing from permanent financing
  • 5% down payment is due at the closing of the construction loan, but can be reimbursed once the home is built
  • Able to choose from a variety of loan programs for the permanent mortgage (including government-backed loans with no or low down payment requirements)
  • Final interest rate determined after construction is complete

When you are looking into building a home, don’t forget to also do some research on New Home Construction loans and whether you prefer a one-time or two-time close. Speak with your lender and get pre-approved prior to choosing your official builder. Being able to prove your financing looks good to both sellers and builders!



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