How do home building loans work?

Many prospective homeowners love the idea of building their own custom home – one that doesn’t look quite like anything else out there, one that fits the unique vision they have for their living space. Yet many are reluctant to go down the route of custom home building – often on faulty premises, such as a misguided notion that building your own home is prohibitively expensive, or more costly than buying an existing home.

One reason for this misconception is that many are simply not aware of the range of finance options available to them. Just as our country has made mortgage loans within reasonable range of many ordinary people who would otherwise never be able to afford pricey homes, there are plenty of financing options available in the form of home building loans – making it possible and affordable to build a new home from scratch.  

Generally speaking, home building loans often also cover the price of the land plot, adding in that price to the total cost of construction as well.

Because of these added layers of complexity involved in these loans, they can often come with more lender involvement than you might have experienced yourself with other types of loans. You will likely receive the loan in the form of intervals that come throughout each phase of the construction process, but you will only be required to pay on the interest throughout this process.  

Depending on the specifics of your project, you may be in the market for a stand-alone construction loan in which you will later need to obtain a separate mortgage for the housing structure itself – or you may choose to opt for a construction to a more comprehensive construction to permanent loan. Keep in mind that if you have scraped up a smaller down payment, you might consider opting for a stand-alone loan. 

As with any housing loan, be sure to do your due diligence in advance and consult with your bank or financial advisor as you embark on the journey to your own custom home. Be sure to get your financial house and savings in order well in advance, ideally including a consistent income base and a credit score of at least 670 or higher when pursuing a home construction loan.