Custom Home Construction Loans: What You Need to Know

Building your dream home is an exciting venture – albeit one that requires careful planning, especially when it comes to financing. From choosing the right builder to obtaining a construction loan, each step is crucial to ensure that your project runs smoothly. When it comes to financing, custom home construction involves a specific type of loan known as a construction loan. Before you dive headlong into this ambitious endeavor, it’s essential to understand what a construction loan entails.

A construction loan is a short-term loan used to cover the cost of building a home. Unlike a traditional mortgage loan, which is based on the value of an existing property, a construction loan is dependent on the projected value of the home after construction is completed. Also noteworthy is that the loan disperses funds in stages, or “draws,” as work progresses rather than upfront.

So, how does this type of loan work and what do you need to know?

Here are some key points to consider:

1. Two Types of Construction Loans

There are two primary types of home construction loans: “construction-to-permanent” and “stand-alone” construction.

A Construction-to-Permanent Loan

A construction-to-permanent loan automatically converts to a regular mortgage once the construction is finished, meaning only one application and closing process. You repay the loan over a period of time with interest.

A Stand-Alone Construction Loan

On the other hand, a stand-alone construction loan only covers the cost of construction. After completion, you’ll need to apply separately for a mortgage to pay off the construction loan, requiring two sets of closing costs. This type of loan might be suitable if you’re living in your current home and waiting for its sale to finance your new home.

2. Higher Interest Rates and Down Payments

Because construction loans involve more risk, they typically come with higher interest rates and down payments than a traditional mortgage. Lenders usually require a down payment of 20-30% of the loan amount. Thus, having a solid financial plan in place is crucial when considering a construction loan.

3. Builder Selection is Key

Since lending institutions recognize the significance of a reputable builder in risk mitigation, working with a reliable construction company like Prospect 30 Eight Construction can improve your chances of loan approval. Our award-winning team, led by third-generation builder Chris Moore, prides itself on honesty, transparency, and unparalleled service. With a commitment to meticulous craftsmanship and effective communication, we strive to ensure your construction journey is satisfying every step of the way.

4. Close Communication with Your Lender is Essential

Throughout construction, having open lines of communication with your lender is vital. Regular updates allow your financial institution to release the necessary funds in stages, helping keep your project on track.

Understanding the ins and outs of custom home construction loans can help alleviate potential financial hiccups along the way. Remember, the right team combined with strategic financing choices can exponentially elevate your custom home building experience.

At Prospect 30 Eight Construction, we’re committed to making your home-building dream a  reality. Since 2006, Prospect 30 Eight Construction has been building top-quality custom homes, home additions, and Accessory Dwelling Units (ADUs) throughout the Denver Metro Area and the Front Range. If you have any questions, please contact us for a free consultation.