How to Get Construction Financing

Just as you can get a home loan to buy an existing property, you can get construction financing for your new custom home.

Instructions

Difficulty: Moderate

Things You’ll Need:

• Calculators
• Contractor Referral Services
• Home Design Software
• Online Mortgage/finance Services

1. Locate and purchase a building site.
2. Purchase a house plan or have one custom-designed.
3. Find a builder and obtain a contract specifying the price for construction.
4. Inquire with your bank regarding a construction loan that could possibly roll over into a permanent mortgage upon completion of the house.
5. Check with mortgage companies - many offer hybrid loan packages for construction of custom homes.
6. Apply for the loan at your chosen lender.
7. Include a financial statement (filled out on the lender's form), blueprints, a survey of the lot, a construction budget and any other information of this type that the lender requests.
8. Request a construction advance schedule that matches your obligations to the builder so that you don't suffer cash-flow difficulties during construction.

Tips & Warnings

• If your bank is not interested or competitive in providing your permanent loan, consider getting an up-front approval elsewhere. The existence of this "take-out" loan, ready to pay off the construction funding, may make it easier to arrange the financing or receive better terms.
• The fees can be significant on a construction loan. You may have to pay points, appraisal costs and even the bank's attorney fees. You'll also have to pay an inspection fee each time the bank makes an advance.
• You may not be able to finance any portion of the land purchase. Many banks will lend the full construction amount, secured by the entire property (lot and house).
• Construction loans are almost always variable rate loans, with the interest rate floating in response to market conditions.