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Before You Build: The Blueprint for Financing Your Dream

By: Jen Ammerman, FNBO Construction Mortgage Specialist

Whether you’ve been sketching, searching, spec-ing and dreaming about it forever, or you’re just starting to think about building a home, you may likely be wondering about financing and how the process differs from buying an existing structure.


The first thing to understand: you’ll need to purchase land to build upon.

Unless you’re able to fund the cost of the property out-of-pocket, you’ll obtain a “lot loan.” While this type of financing can resemble a standard mortgage—that’s where the similarities end.

With a lot loan, you may have to say “buh-bye” to zero- down financing deals available with a home mortgage, and many financial institutions require an even larger down payment. It could be 25 percent, or more. You may also need to provide proof of reserve savings to cover future payments, and expect the lender to require a higher, qualifying credit score.

Keep in mind, too, that financing doesn’t end with the purchase of your lot. Before you break ground, you’ll need to secure a construction loan to bring your blueprints to life.

FINANCING YOUR CUSTOM HOME A construction loan is a short-term loan designed to fund expenses related to building your home. The process is similar to that of a mortgage, but there are differences.

First, you’ll be applying for two loans. One to cover the material costs for construction and one to convert that loan to a “permanent” mortgage.

With a construction loan, you and your builder will draw down the loan during the construction phase, allowing your lender to make periodic disbursements to cover materials and supplies. During this time, you will typically make interest-only payments based upon the amount drawn. Once the construction is complete, your lender will transition your loan into the “permanent” mortgage to cover the cost of your finished home.

Since you are applying for more than one loan, you may have multiple closings. A buyer purchasing land with no immediate plans to build will require one closing for the lot loan and a separate closing for the construction loan when building begins.

If construction starts immediately, it’s possible to close on the lot purchase and the construction loan simultaneously; same time and place.

STARTING EARLY, THE KEY TO SUCCESS Given the complexities of financing a custom build, it’s a good idea to start the process well in advance and get preapproved through your lender. That way, you are fully prepared to discuss a realistic budget with contractors. It’s also wise to select your floor plan and get builder estimates before buying land.

There are also ancillary expenses, like the cost of connecting utilities, health department fees for septic and water, and even third-party testing that may be required for adherence to codes. A qualified builder will include them when providing estimates, so be prepared.

Building a home is exciting! You can create your vision from the ground up and bring your personality to the project. Can it be stressful? Yes. So, start early, know what you’re getting into, and work closely with your lender and builder. You may have only ideas on paper today, but with good planning, those dreams will become your future home, sweet home.


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