A Step-by-Step Guide to Construction Loans

Finding the perfect house can be a challenge. When you can’t find your dream home on the market, building your own might be the best option. However, the process of building a house, securing construction loans, and financing a lot loan can seem daunting. In this post, we’ll break down the steps and help you understand the essentials of building your dream home from scratch.

Step 1: Build Your Team

The first crucial step is assembling your team. Surprisingly, the most important person on your team is the builder. It might sound obvious, but many people make the mistake of buying a property without consulting their builder first. This can lead to complications if the lot has easements, encroachments, or other issues that prevent you from building the house you want.

So, start with finding a reliable builder. Your next step is to consult your lender. It’s essential to ensure you qualify for the construction loan before purchasing the lot. Many people secure a lot loan only to find out later that they don’t qualify for a sufficient construction loan.

Additionally, you’ll need an architect to design a home that meets your needs and a realtor to help you find the right property. Your realtor should work closely with your builder and architect to ensure the lot you buy is suitable for your dream home.

Step 2: Buy The Lot

Once your team is assembled, it’s time to secure financing. There are two ways to buy a lot: paying in cash or getting a lot loan. If you don’t have the cash to buy the lot outright, a lot loan can help you acquire the property while maintaining your liquidity.

Lot loans typically require a down payment of 15% to 25%. If you finance the maximum amount on the lot loan, be prepared to bring more money to the table during the construction phase.

Step 3: Get a Construction Loan

With your team and lot in place, the next step is securing a construction loan. This loan will cover the costs of building your home and pay off the lot loan if you financed the lot. Construction loans are structured to be interest-only during the building phase. You only pay interest on the amount that has been drawn for construction, not the full loan amount.

Construction loans can be either one-time close or two-time close. A one-time close loan locks in your rate from the beginning, converting automatically to a permanent loan once construction is complete. This option is beneficial if interest rates are expected to rise. A two-time close loan involves closing once for the construction loan and again for permanent financing after construction. This can be advantageous if interest rates are expected to fall, allowing you to secure a lower rate for the permanent loan.

Step 4: Move In

Once construction is complete, it’s time to move in! If you opted for a one-time close loan, your loan automatically converts to permanent financing. If you chose a two-time close loan, you will need to secure permanent financing to pay off the construction loan. Ensure you have everything in place for permanent financing to avoid carrying the costly construction loan longer than necessary.

Conclusion

Building a house can be a complex process, but with the right team and proper planning, you can navigate it successfully. Start by assembling your team, securing financing, understanding the construction loan process, and finally, moving into your new home. If you’re ready to build your dream home, reach out to us—we’ll guide you through every step of the way.