How to Secure Funding for Your Custom Home

Building a new home is a major investment, but you don’t have to go it alone. In designing and building your dream home, you’ll invest more than money–you’ll invest your time and your creativity, as well as your hopes and dreams. Choosing a builder you trust can take much of the stress out of your investment, because on a new construction loan, the reputation of your builder also comes into play to help you get financing.

An experienced builder lowers the risk for the lender and can make it easier to get your loan approved. An experienced custom home builder will also save you money by ensuring that your construction project is planned in detail and well-organized. This makes staged loan payouts during construction go smoothly to avoid construction delays. Here are some basics about new construction loans to help you get started.

Shop for Your Lender

Funding a new-construction, custom home is different from getting a traditional mortgage, at least initially. As with any loan, the better your credit, the better the loan terms and interest rate you can expect. Not all banks offer construction loans, so you may need to shop around and you may have better luck at community banks that are familiar with local marketplace.

Your home builder or real estate agent may be able to recommend a lender. When you find a lender, they will likely require a sizable down payment for your construction loan. Be sure to compare loan terms and APRs (annual percentage rate of charge) from various lenders before making your final decision on funding for your new custom home.

Equity Sources to Secure Funds for Your New Custom Home

  • Financing the new build only: If you already own the land where your home is to be built, you may be able to use any available equity as a down payment for your new construction loan.
  • Selling your old home: You could also draw upon equity in the home you’ll be moving from, or sell that home first, in order to fund the new build. The timing of your old home sale and the completion of the new build will likely not be in sync. You would need to arrange a temporary home/rental and place belongings in storage, if your old home sells before the new one is built. If you have investment properties, you could consider drawing on this equity.
  • Bridge loans can help you coordinate the sale of your current primary residence with the completion of the new build. These 6 to 9 month, higher rate loans help fund your new home by drawing against your home equity, before your current home sells. Once your home is sold, the funds will pay off the bridge loan.

How New Construction Loans Work

  • For your new custom home, lenders may offer a one-step loan with interest-only payments during home construction. This loan would then be converted into a 30-year or 15-year mortgage (or an ARM, adjustable rate mortgage), as soon as the house is completed, with only one round of closing costs.
  • Other lenders offer a two-step loan, where you must actually refinance your initial interest-only construction loan when the building is complete. Then, you would take out a conventional mortgage on the completed home. Each loan would likely have separate closing costs, with the short-term construction loan at a higher rate, and the mortgage at a lower rate.
  • Construction loans are typically paid to the homebuilder in stages, at construction milestones after bank inspection of the progress.

At Miller’s Residential Creations, we’re here to help you create the home you’ve always wanted. Schedule a free consultation, so you can get specific information about planning and building your dream home.

Brian Miller is the owner of Miller's Residential Creations, a custom home builder and remodeling company servicing Berkeley, Jefferson and Morgan Counties of West Virginia since 2004.
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