Building When the Right Home Isn’t Available

Shopping for a home can be exciting, but sometimes the right home simply is not available. When existing inventory does not match your needs, a construction loan can offer a path to building a home that fits your plans from the start.

Construction financing works differently than a traditional mortgage, so understanding the process can help you decide if it is the right next step.

What Is a Construction Loan?

A construction loan is short-term financing used to cover the cost of building a new home. Unlike a traditional mortgage where the home already exists, construction loans provide funds as the home is being built. Once construction is complete, many borrowers convert the loan into long-term financing.

There are two common types of construction loans:

Stand-alone construction:
This loan covers only the build phase. When the home is complete, the borrower secures a separate permanent mortgage to pay off the construction loan.

This structure can come with two sets of closing costs, and the permanent mortgage rate cannot be locked until the construction is finished. However, it may offer more flexibility for borrowers who want to choose their long-term loan later.

Construction-to-permanent:
This option combines the construction financing and the permanent mortgage into one loan with a single closing. The interest rate is set at the time of closing and remains the same through both phases. This is often the more streamlined and predictable path for many borrowers.

What You Need to Qualify

Construction loans involve more moving parts than a traditional mortgage, which means there are a few extra steps in addition to your standard loan review.

Work with a licensed general contractor:
Most lenders require that the home be built by a licensed, insured, and experienced general contractor. Acting as your own general contractor is usually not permitted and can make it difficult to qualify.

Provide construction plans and cost details:
You will need to submit full plans and specifications for the property. This includes floor plans, materials, dimensions, and a detailed cost breakdown from your builder. Lenders use this information to understand the scope of the project and verify that the numbers align with local market expectations.

Obtaining the value based on the proposed build:
As part of the lending process, an appraiser reviews your plans and compares them to similar homes in the area to determine the future value of the completed property. This value helps set the maximum loan amount available.

Prepare for a down payment:
Down payment requirements for construction loans are often higher than for traditional mortgages. Many programs require at least 20–25% down, depending on the project and loan type.

How Funds Are Disbursed

Construction loans do not provide the entire loan amount at once. Instead, funds are released in stages called draws. Each draw aligns with a phase of construction such as foundation, framing, mechanicals, and final completion.

The lender reviews progress before releasing each draw to help ensure the project is on track.

Planning Considerations

Project delays or budget changes:
If construction takes longer than expected or costs increase, additional expenses may come into play.

Temporary housing needs:
Borrowers usually continue paying for their current housing until the new home is complete, so knowing your budget is key.

Market value shifts:
If the finished home appraises for less than expected, additional funds may be required to complete the permanent financing.

Financial changes during construction:
Permanent financing is required at completion. A change in income or employment could affect qualification.

Is a Construction Loan Right for You?

Construction loans allow you to create a home that matches your vision, location, and lifestyle. They offer flexibility and control that existing homes cannot always provide.

At the same time, they require careful planning, a trusted builder, and proactive communication throughout the process.

If building a home fits your goals and you are prepared for a more involved experience, construction financing can be a powerful tool to bring your plans to life. If you prefer a simpler path, exploring traditional home options may be the better fit.