How to Get a Loan to Build a Custom Home
July 10, 2020
If you have owned a home before, chances are you are somewhat familiar with the home loan process. Getting a loan for a custom-built home looks a little different. At 4G Design Build, our home builders often get asked questions revolving around the topic of how to get a loan to build a custom home.
In order to build your very own custom home from the ground up, you will need what is called a construction loan. Most people aren’t familiar with construction loans as they are vastly different from a typical mortgage. In this blog, we hope to shed some light on the topic of custom home financing.
What Are Construction Loans?
If you want to build a new custom home from the ground up but don’t have the funds to pay for it out of pocket, a construction loan will likely be your best option. These loans are used to cover the costs of building a home. This loan works in a way that once the funds from the construction loan have been used and the house has been built, the loan is typically converted or refinanced into a standard, long-term mortgage loan or paid off by other means. This is a short-term loan — funds are typically available up until the construction process is completed.
Which Construction Loan Is Best?
There are many home construction loans available. Typically, our custom home builders find that construction-to-permanent loans are often the best choice for our clients because it is a bit more simple. With this type of loan, all your financing is combined into a single transaction, which means you will only have to complete one application and go through one closing process. This can make financing your home simpler — and potentially more affordable — as you will only be paying closing costs on one loan. Plus, once your custom home is complete, you won’t have to worry about not being able to obtain financing for a mortgage; your loan will simply convert into a permanent loan once the construction is completed.
The Benefits of Construction-to-Permanent Loan
- You only pay interest, no principal, during the construction process
- You only pay interest on the portion of the loan you use
- EX. If it takes $50,000 to complete the initial phase of building your home, your payment will be toward that $50,000, rather than the entire purchase price of your project
- You essentially get two loans in one rather than dealing with two separate loans
How to Get a Construction Loan?
As with all home mortgages, the minimum credit score, maximum debt-to-income ratio, and down payment required for a construction loan will vary depending on the lender you work with. We recommend that clients visit their local bank to get a construction-to-permanent loan as, in most cases, they are easier to work with. Once you have secured a construction-to-permanent loan you will be ready to start building your custom home.
Work With Our Team of Custom Home Builders in NC
Have questions about getting a loan to build a home? Our home builders are happy to help and point you in the right direction. With detailed planning, patience, and working with our custom home builders, followed by some exciting decision-making, you will be home before you know it.
If you would like to learn more about how to get a custom home loan, watch this video! For more videos and answers to frequently asked questions related to building custom homes, be sure to subscribe to our Youtube channel and keep an eye out for the next video in our series.