Home Construction Loans: What to Consider

While some people search for their dream home among a pool of houses already built, others prefer to customize them by building on a specific plot of land. If building your dream home appeals to you, you may want to consider a home construction loan that’s designed to help you with home construction financing.

Before you begin, you'll need to understand lot restrictions, find the right builder, and search for a home construction loan.

1. Check your lot restrictions

The first step is to determine what building restrictions may apply to your lot. If you’re purchasing or already own a lot in a subdivision, check with the homeowner’s association or review the subdivision’s restrictive covenant.

A restrictive covenant outlines the rules for use of the property and details any other obligations you need to adhere to when designing and building your new home. Its purpose is to ensure the subdivision maintains its property value and aesthetic appeal.

Potential restrictions or guidelines may include:

• Height and overall size of buildings
• Building proximity to other structures
• Distance from the road or a water source
• Architectural features
• Landscaping
• Fences
• Pools

If you plan to build on land that is not part of a subdivision, check government zoning restrictions to ensure your construction will comply with existing requirements for your area. Even if you meet the requirements, lenders may have additional restrictions on financing home construction on lots not part of a subdivision, so discuss your construction plans with a lender in these circumstances.

2. Find a reputable builder

Once you know your options, you're ready to search for the right general contractor or builder who can help develop your plans and specifications, and ultimately execute them. Ask around for referrals of builders or contractors with a strong track record of building quality homes on time and within budget.

Here are some other things to keep in mind:

• Check references for the builder or contractor and verify they are properly licensed and insured to build in the state where your home will be located.
• Before you begin construction, make sure your plans and specifications are complete and clearly outlined so you have a good understanding of what your builder will provide. Lenders will require you to have your plans and specifications in place before applying for your home construction financing.
• Determine the timeframe for construction. When will the home be completed?

3. Search for home construction financing

As your plans begin taking tangible form, you'll need to find home construction financing for your project. Many lenders offer a home construction loan that covers construction expenses and then becomes a permanent mortgage once the home is complete and you receive a certificate of occupancy. This type of financing is referred to as a construction-to-permanent loan, or a C/P loan.

Most of these home construction loans have a limited construction term, often no more than a year. During construction, the lender will disburse money to the builder as work progresses, and you typically make interest-only payments calculated on the amount of the loan that has been disbursed.

An alternative to this form of home construction loan is called an “end loan.” In this case, the builder assumes the cost of construction. Once the home is completed, you purchase the home from the builder using proceeds from a mortgage loan.

More information

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