Financing Your Dream Home: How to Get a Loan to Build a House on Your Own Land

For many people, building a custom home on land they already own is the ideal way to get exactly the house they want. When you build on your own land, you can choose the location, design, features and more. However, financing the construction can be complicated. A construction loan, also called a single-close loan, allows you to get one loan to cover purchasing the land and building the home.

Is a Construction Loan Right for You?

A construction loan has some distinct advantages if you want to build on land you already own

• One loan, one closing: You don’t need separate loans for the land and the construction. Everything is wrapped up in one convenient loan.

• Equity in land counts If you already own the land outright your equity counts toward the down payment. Typically only 3.5-5% down is required.

• Custom build: You can build the home of your dreams from scratch. Choose floorplans, materials, fixtures and more.

• Potential cost savings: In some cases, building new can be less expensive than buying an existing home. You aren’t paying for previous owners’ remodeling.

However, construction loans also have some downsides to consider:

• More complex process: Much more is involved compared to buying an existing house. Make sure you work with an experienced lender and builder.

• Strict guidelines: The lender will only release funds in stages as work is completed. You’ll need to document the progress.

• No guarantees: Issues like bad weather or supply shortages can cause delays and budget overruns.

• Short terms: Most construction loans only cover the building period, then you must refinance into permanent financing.

As long as you go in understanding the pros and cons, a construction loan can be a great option to build your dream home on your own terms.

Construction Loan Basics

Construction loans are offered by private lenders and through government-backed programs like FHA and VA loans. Here are some key facts:

Down payments

• FHA loans require 3.5% down
• VA loans allow 0% down for qualified veterans
• Conventional loans typically need 5-20% down

Loan terms

• 1 year is common, with possible 6-12 month extensions
• Must refinance into permanent end loan when construction is finished

Loan amounts

• $200k – $750k is typical
• Jumbo loans over $750k are possible depending on lender

Interest rates

• Rates are similar to traditional mortgages, perhaps slightly higher
• Fixed or adjustable rates are available

Funding

• Loan disbursed in stages as work is completed
• Inspector verifies progress before each draw

Be sure to find a lender experienced with construction loans. They can guide you through the multi-step process.

How Construction Loans Work

Construction loans provide financing through each phase of the building project:

Pre-qualification

• Review your finances and land to see if you qualify in advance

Land purchase

• If you don’t already own the land, the loan can cover purchasing it

Initial down payment

• You’ll need to pay a down payment upfront before construction begins

Draws

• The loan is disbursed in installments as work is completed

Interest-only payments

• You only pay the interest monthly during construction

Construction

• Builder constructs home based on approved plans

Refinance for permanent financing

• Once home is finished, you get a standard mortgage

It’s more complex than financing a home that’s already built, but allows you to fully customize your home.

Getting Started with a Construction Loan

If you’re considering a construction loan, here are some key steps:

Find the right lender

Work with a lender who is experienced with construction financing. They will guide you through the process.

Get pre-qualified

This helps you know how much home you can afford to build. They will assess your finances and the land value.

Select a lot or use your own

If you don’t already own the land, choose a lot in an approved area for building, utilities, etc.

Pick house plans

Hire an architect to draw up house plans that match your budget and the lot.

Get the builder on board

Choose a reputable builder and sign a construction contract outlining the project.

Submit plans for approval

Your lender will review the plans to make sure they meet loan requirements.

Secure permits

You or the builder will need to get proper building permits before work begins.

Once approved, you can move forward with the exciting process of building your dream home!

Finding the Right Construction Loan

With many loan options out there, how do you choose the right construction loan? Here are key questions to ask:

• What are the down payment requirements? 3.5% or higher. Make sure you meet the minimum for the programs you are considering.

• What’s the maximum loan amount? Most lenders top out around $750k, but jumbo loans may be possible.

• How long is the construction phase? Usually 12 months, but can be extended 6-12 months with paperwork. Make sure it’s long enough for your build.

• What happens after construction? You’ll need to refinance into a permanent mortgage. Ask about streamlined options.

• What are the draw requirements? The lender will want to inspect before releasing funds. Understand the milestones.

• What can the loan pay for? In addition to the build, loan funds can be used for land, fees, permits, and more costs directly related to the home.

• How much are the closing costs? Closing costs are typically higher for construction loans. Make sure they fit your budget.

Shop around with multiple lenders to get construction loan quotes customized for your project.

Construction Loan Process Step-by-Step

If you decide a construction loan is the right fit to build on your own property, here is a simplified step-by-step process:

1. Pre-qualification

Meet with a lender to get pre-qualified and discuss the project. They will review your financials, credit, the land value and more. This pre-approval shows you can likely get a construction loan.

2. Submit house plans

Once you have home plans drawn up, submit them for the lender to review. They will make sure the designs meet the loan requirements.

3. Loan estimate

The lender provides a loan estimate showing the loan amount, fees, projected payments and other details so you know what to expect.

4. Secure building permits

You or your builder will need to secure all required local and state permits before starting construction.

5. Appraisal

The lender will order an appraisal of the land value as well as the estimated home value when complete. This confirms the loan-to-value ratio.

6. Loan approval

With all the pieces in place, the lender can officially approve the construction loan and issue a loan commitment letter.

7. Closing and groundbreaking

Now you can close on the loan, pay any upfront fees, break ground on the lot, and start building!

8. Draws

As work is completed in stages, the lender releases additional loan funds after inspecting the progress.

9. Construction

Your builder follows the approved plans, while you make minor modifications along the way if needed.

10. Refinance for permanent loan

Once construction is finished, you refinance into a traditional mortgage to pay off the construction loan.

While the process involves extra steps, it leads to you owning a fully custom home on your own land!

Tips for a Smooth Construction Loan Process

Follow these tips to help your construction loan and build go as smoothly as possible:

• Be ready to pay upfront costs – In addition to the down payment, factor in closing costs, permit fees and prepaid interest. Budget around 5-10% of total costs.

• Get contractor references – Choose an experienced builder with proven success on other projects similar to yours.

• Check contractor licensing – Make sure your builder is properly licensed and insured to work in your area.

• Understand the draw schedule – The lender will only release funds in stages based on strict inspection criteria to ensure work is progressing.

• Factor in contingency funds – Even with careful planning, expect the unexpected like weather delays or material shortages. Leave a 5-10% cushion.

• Document changes – If you need to modify plans mid-stream, get written change orders approved by the lender so the new costs are covered.

• Compliance is key – Follow all requirements set by the lender, inspectors, permitting office and your contract. Deviating