New Home Financing: Construction Loan 101

Pittsburgh custom home builderBuilding a new home requires lots of research and decisions about location, design, and financing. Staying on budget is important, and your builder should be taking steps to communicate all costs and keep your new home project on budget and on time so there are no surprises on closing day.

But what about the first step of getting a new custom home project financed? Whether you will be selling an existing home or making a move from renting to new home ownership, building new provides the opportunity to obtain a construction loan to get started. Unlike shopping for a conventional mortgage, construction loans are a specialized market. Ask your builder if they offer any finance packages with an approved lender, or for recommendations on where to apply for a construction loan.

How do they work? Think of it as a credit card that you will use only for the months your new house is under construction. After you have been approved for a construction loan, the lender will pay your builder at designated times throughout the project, after phases of work are completed. When your custom home is ready and you obtain a regular mortgage, the mortgage will pay off the balance of your construction loan.

Construction loans are also often used for large renovation projects. Whether renovation or new construction, these loans are approved based on an appraised value of what your home will be worth once it is completed. Lenders look at other comparable homes in your neighborhood to determine your home’s future value.

Similar to a mortgage, you will need to have a firm idea of your budget, current credit reports, and other financial information put together before you start looking for a construction loan. Your lender will not only check your financial history, but will look into the reputation and credentials of your builder. Because they are short-term loans, construction loans typically require a higher down payment than a conventional mortgage – at least 20 percent of your project cost. If you already own a lot, the lender may let you use the property as equity instead of making the down payment in cash.

Finding a builder who you trust is a good first step to figuring out your financial options for a new home project. We are happy to answer any questions about construction loans and other financing options to make your dream home an affordable reality. Contact us for more information.