You don’t just want to purchase or renovate an existing house, you want to build your dream home —the one where you picture gathering around the dinner table with loved ones, where you envision curling up on the couch with a good cup of coffee, where you hope to spend your years making endless memories.
Building your dream home is a major undertaking, but the right financing can make it possible. That’s where custom construction loans come in.
What is a custom construction loan?
A custom construction loan is a short-term construction loan used to finance the build of a new custom home. The terms of a custom construction loan are usually around one year, giving borrowers the flexibility to complete their build before securing long-term financing.
A custom construction loan is not the same as a traditional mortgage. Mortgages are long-term loans used to purchase an existing property or refinance an existing loan.
What does custom construction funding cover?
Custom construction loans cover only the expenses related to the construction. For instance, they cover land, labor, materials, permits and other fees. These loans do not include design costs, so if you’re planning on hiring an architect or a designer, you will be responsible for those fees.
How does a custom construction loan work?
When you meet with a lender, due to the tight timeline of a custom construction loan, you will need to provide several documents like an anticipated timeline, a construction plan, and a budget. Many lenders require borrowers meet certain financial requirements, like a strong credit score and a reasonable debt-to-income ratio (the percentage of your total income that goes toward your current debts).
Some lenders, like Legacy, will adjust the loan if you go over your submitted budget while others will not. In that case, it’s up to you to make up for the difference through changing your construction plans or paying out of pocket.
While you’re building, your funding is provided in stages. You reach out to the lender to complete a “draw,” or a withdrawal of funds from your total loan amount, in order to cover your costs. Some lenders require inspections around each stage in order to approve the draw to ensure that the new home (or homes) on your property are progressing.
Once your build has been completed, you often have the ability to convert your custom construction loan into a permanent mortgage loan through refinancing. During your build, you are only responsible for interest payments to the lender on the actual funds drawn to date. After your dream home is completed and you can enjoy your investment, you will pay both your principal (the amount borrowed) and interest on the loan.
I’m interested in securing a custom construction loan. Where do I start?
Before you put your vision to work, you should prepare through the following steps:
- Not all construction loans are the same. Compare lenders to understand their loan terms, requirements, and flexibility. Ask yourself important questions like:
- What are the eligibility requirements?
- What’s the interest rate?
- Once you’ve identified a lender that fits your needs, start the pre-approval process. This preliminary approval will help you determine how much financing you qualify for based on your financial history.
- Find a property that aligns with your vision and meets your lender’s guidelines. Equally important is selecting a reputable builder who understands the construction loan process. Ensure your builder is licensed, experienced, and capable of completing the project within the expected timeline and budget.
After this preparation, you’re ready to apply for a custom construction loan with your lender.
Legacy Group Capital offers a fast and flexible custom construction loan in all eight of our markets: Arizona, Colorado, Idaho, Montana, Oregon, Texas, Utah and Washington. To learn more about our Custom Construction Loan, and to find out if you qualify, connect with one of our loan officers today.
