New construction financing: Building your custom home

Financing new construction

Buying a brand-new home is exciting. Everything's fresh, you get to pick finishes, and there's no previous owner's issues to inherit. But financing new construction has some unique considerations compared to buying an existing home.

The approach depends on whether you're buying from a builder or building your own custom home.

Buying from a builder

When you purchase a to-be-built home from a production builder or spec home from their inventory, financing is relatively straightforward:

For completed or nearly completed homes: Standard purchase financing. You can use conventional, FHA, VA, or other loan programs. The process is the same as buying an existing home.

For homes still under construction: You'll get pre-qualified, sign a purchase agreement, and lock your rate closer to completion. The builder typically sets the closing timeline.

Builder incentives and preferred lenders

Most builders have a "preferred lender" and offer incentives to use them:

• Closing cost credits ($5,000-15,000 or more)
• Upgrades (appliances, countertops, etc.)
• Rate buydowns

These incentives can be valuable, but you should still compare. Sometimes outside financing with better rates beats the incentives. Other times the builder's deal is genuinely better.

We're happy to run the numbers against builder lender offers so you can make an informed choice.

Extended rate locks

New construction timelines are unpredictable. A home that's supposed to close in 4 months might take 6 or 8. Standard rate locks expire after 30-60 days.

For new construction, you'll need an extended rate lock (also called a "builder lock" or "construction lock"). These lock your rate for 6-12 months but come with a cost, either an upfront fee or a slightly higher rate.

The trade-off is protection against rate increases during the build period.

Construction-to-permanent loans

If you're building a custom home (not buying from a builder), you'll likely need a construction-to-permanent loan. This combines the construction financing and permanent mortgage into one loan.

How it works:

1. Get pre-qualified for the full loan amount
2. During construction, you draw funds as work progresses
3. Make interest-only payments during construction
4. When complete, the loan converts to a standard mortgage

This approach requires more documentation (plans, contracts, builder qualifications) and has slightly higher rates during construction.

One-time close vs. two-time close

One-time close: Single loan that covers both construction and permanent financing. One set of closing costs. Rate locked at the start.

Two-time close: Separate construction loan and permanent mortgage. More flexibility if you want to shop rates at completion, but you pay closing costs twice.

For most borrowers, one-time close is simpler and less expensive overall.

Requirements for construction loans

For construction-to-permanent loans, expect:

• 10-20% down payment
• 680+ credit score
• Detailed construction plans and budget
• Licensed, insured builder
• Building permits in place
• Appraisal based on plans (not just land value)

Lenders scrutinize custom builds more carefully than standard purchases because of the additional risks involved.

Land purchase

If you're buying land to build on, you have options:

Land loan: Finance the land separately, then do a construction loan later. Land loans typically require 20-30% down and have higher rates.

Land and construction combined: Some construction loans include land purchase. You close on the land and immediately begin the construction phase.

If you already own land free and clear, its value can count toward your down payment on the construction loan.

Timeline considerations

New construction takes time:

Builder homes: 4-12 months depending on market conditions and build stage when you commit

Custom builds: 9-18 months from breaking ground to moving in

During this time, you'll need to manage your current housing situation. If you're selling your current home, timing the sale with your new home completion requires planning.

Tips for new construction financing

1. Get pre-qualified early: Builders want to know you can close before letting you lock in a lot or sign a contract.

2. Understand the builder's timeline: Ask about realistic completion dates and what happens if they miss them.

3. Budget for upgrades: The model home has all the upgrades. The base price doesn't. Plan accordingly.

4. Don't skip the inspection: New doesn't mean perfect. Get an independent inspection before closing.

5. Compare builder lender incentives: They can be generous, but do the math.

Ready to build?

Whether you're buying from a builder or planning a custom home, we can help you navigate the financing options. Get pre-qualified to start the process, or schedule a call to discuss your new construction plans.