There’s no doubt that building your own house can be full of excitement. While we give would-be homeowners that feeling, financing a new home construction is something that needs serious consideration. 

Before you begin the construction work, it’s crucial to consider how you’re going to pay for it and how much you can afford. Building your custom home requires a sizable amount of money, which means you need to take a loan to cover some of the cost. 

Here’s a guide on how to finance your dream custom home and a summary of the different loan options available today. 

How to Get Started

The first step if you want to obtain a loan is to speak to a lender. The lender can help you understand the various loan options to start your home construction. If you don’t know any lender, you speak with your builder to connect you to a lending company that can provide you with money. 

Lenders will check essential financial information to determine if you’re eligible for the loan. It’s common for lending companies to check the employment status, credit score, and existing debt obligation of the applicant. Such financial information allows the lender to assess your eligibility and create a secure financial plan. 

Lending companies have different financing programs tailored for a particular type of borrower. There are loans for veterans, first-time home buyers, and borrowers living in rural areas. These loans have their own pros and cons, depending on your financial capacity and the custom home project you want to build. 

The lender will appraise your project using the proposed construction plan and building specifications to determine the loan amount you can borrow. 

Financing Options for Your Custom Home

As mentioned, you have a variety of loans to finance your custom home project. It’s all up to you which is which, but it’s crucial to consider the pros and cons of these loan options. 

Construction Loan

For people who want to build a custom home, a construction loan is one of the most common financing options. This short-term loan typically has a period of one year, and it comes with a draw schedule which happens at different stages of the project, such as the laying down of the foundation and framing. 

Among the advantages of a construction loan is that the borrower only has to pay interest on the portion of the money that has been dispensed throughout the project. Once your custom home is completely built, you have the option to get a new loan to pay off the construction loan or refinance it into a permanent mortgage. 

Most lending companies demand a 20% to 25% down payment on construction loans. If you have a limited credit history, you might find it hard to obtain this type of loan. Lenders are strict on the credit requirement side because the house is yet to be built, which means there’s a lack of collateral for the loan. 

As the borrower, you must provide a comprehensive information on the construction project. Plus, you also need to ensure that the builder for the custom home project is highly qualified. You can apply for a construction loan at local or regional banks and credit unions. 

Builder Financing

Another route you can take to construct your dream home is through builder financing. Some builders are willing to finance the project during the construction stage. After the construction is complete, you need to get a conventional loan and live in the finished home. Then, you have to provide the builder with proof of qualification for the loan. 

One of the requirements imposed by the builder before the beginning of the construction is a non-refundable deposit. You need to pay this sum to show that you’re committed to the project. 

There’s a disadvantage to builder financing that you need to know. The price and interest rate you must pay for the project can change at the end of the construction. The builder will pass on to you the price adjustments made during the construction period. 

USDA Construction Loan

If you have a low income and want to build a custom home in a rural area, you can obtain a construction loan from the United States Department of Agriculture. USDA construction loans have low interest rates, and borrowers can avail of it with no down payment. 

You need to meet certain requirements to get a USDA construction loan. For instance, you must have a good credit score and hire a qualified builder for the construction. 

Takeaway

Now you know the ways to finance your dream home. I hope that the guide above will help you get the money you need for the construction of your custom home project. You have several loan options for your project, and make sure to do your research to determine which is the best financing for you.