How to Finance the Construction of a New Home

Tuesday, December 12, 2017

New house plans.

There is no shortage of quaint, older homes in the Midlands. But some families need something a little more custom to make their homebuying dreams come true. There's no better way to get exactly what you want than to have a home built especially for you. 

A construction loan is different than your standard mortgage in a few ways. 

  1. A construction loan usually only lasts for about a year. 
  2. Rates on a construction loan are typically slightly higher than on a mortgage. 
  3. After your construction is finished, you'll need to roll your construction loan into a permanent mortgage. 

It sounds complicated, but getting a loan through a credit union can help make construction loans less of a headache. That's because these smaller institutions are able to offer more personal attention to help walk you through the process. If you're already banking with a credit union, chances are the people there know you and are excited to help you grow in your community. No matter where you go for your loan, you should expect a three-step process. 


Applying for a construction loan isn't too different than applying for a traditional loan. The main difference is that your lender is going to want to know what you plan on doing with the loan. That will mean seeing a timeline, a budget, and a building plan. You'll also need to supply many of the same documents as you would for any mortgage loan:

  • Tax returns for the past two years
  • W2s from the past two years
  • Recent pay stubs 
  • Credit card statements
  • Loan statements (student loans, car loans, etc) 
  • Statements for any other options 


Once you find a builder and your home construction begins, your lender will work with you and the builder to disperse your money at certain intervals. That will help you keep the projected funded and create checkpoints for your builder to meet. This helps make sure the project stays on track and you remain happy with your builder's work before you move on to the next checkpoint. 


Once your home is built, you no longer need a construction loan. This is when your lender will convert your existing construction loan to a regular mortgage. You'll have some leeway here if you want to choose a 15 or 30-year mortgage.