Everything You Need to Know About Self Build Construction Loans

Have you ever dreamed of building your own home from the ground up? If so you’re not alone. Many people fantasize about the freedom and satisfaction that comes with designing and building a custom home. However the costs associated with new construction can be intimidating, leaving some to wonder – how do I finance a self build house?

Self build construction loans allow prospective homeowners to secure financing that covers all costs tied to a new home build, Keep reading to learn everything you need to know about self build loans and how they work,

What is a Self Build Construction Loan?

A self build construction loan is a short-term financing option used to fund the building of a new home. As you act as your own general contractor, the lender provides you with the capital needed for land acquisition, materials, labor, permitting fees and more.

Self build loans are disbursed in phases, with each draw request aligned with a specific construction milestone. This system helps reduce risk for the lender.

Once construction reaches completion, these loans can either be paid in full or converted into a traditional mortgage. This flexibility allows you to choose the ideal long-term financing options for your situation.

Benefits of Using a Self Build Construction Loan

There are many advantages to using a self build construction loan compared to other financing options:

• Cover all costs – The loan provides all of the capital you need upfront, including land purchase if needed. This covers 100% of costs.

• Pay-as-you-go draws – You only receive funds as needed, helping you stick to your budget and not overspend early on.

• Short-term financing – Self build loans feature short 12-month terms. This bridges the gap between the build and securing permanent financing.

• Interest-only payments – You only pay interest on the amount borrowed during the construction phase. This keeps payments affordable.

• Flexible options – You can pay off the loan entirely or roll it into a mortgage once the new home is finished.

• Act as own contractor – You remain in full control of the project from start to finish.

Self Build Loan Requirements

While self build loans offer many perks, you must meet certain criteria to qualify for this type of financing:

• Credit score – Most lenders look for a minimum credit score around 640. The higher your score, the better the terms you can secure.

• Downpayment – Expect a downpayment between 10-20% of total costs. The required percentage varies by lender.

• Experience – Proof of experience with home construction projects can help with approval.

• Plans – Detailed building plans must be submitted and approved before funding is released.

• Timeline – A schedule outlining major milestones from start to completion is usually required.

• General contractor – If you do not have home building experience, you may need to hire a general contractor to oversee the project.

Meeting these requirements demonstrates to the lender that you have the means to successfully complete the build. Having experience in particular makes qualification much easier.

How Do Self Build Construction Loans Work?

Now that you understand the basics, let’s take a closer look at the step-by-step process:

1. Application & Pre-Approval

This financing option starts with finding and applying with a lender that offers self build construction loans. The lender reviews your credit, income, expenses and other details to determine if you pre-qualify.

At this stage, you will also submit estimated construction costs, drawings, a schedule, and potentially information about your contracted general contractor.

Pre-approval confirms you meet all requirements for the loan before moving forward.

2. Fulfill Pre-Conditions

After receiving pre-approval, the lender issues a list of stipulations that must be satisfied for full loan approval. This may include:

• Acquiring land for construction if you do not already own a lot
• Securing required permits
• Finalizing building plans
• Adjusting insurance coverage

Completing these pre-conditions shows the lender you are ready to begin. Work with your loan officer to satisfy all stipulations.

3. Final Approval & Closing

Once all pre-conditions are met, the lender will issue final approval. You will then close on the loan, which means signing all documents and legally securing the agreed-upon financing.

Some portion of the total loan may be dispersed upfront to cover initial construction costs like clearing the lot, connecting utilities or other prep work.

4. Construction Begins

Now the exciting part – construction kicks off! You or your general contractor will begin work according to the submitted schedule. The lender may send out an inspector periodically to check on progress and ensure work aligns with the plans.

5. Draw Request for Funds

Each time you need funds to pay for materials or labor, you submit a draw request to the lender. This outlines how much you need and what part of the project the funds will cover.

The lender verifies the work claimed in the draw request before releasing funds, which are then wired directly to your bank account.

6. Make Interest Payments

During construction, you only pay interest on the amounts distributed, not the full loan balance. This keeps payments affordable until the home is complete.

Most lenders deduct payments automatically from the same bank account where draws are sent. Payments adjust based on the outstanding balance as you continue tapping funds.

7. Construction Completes

Once your dream home is finished, you must provide the lender with a certificate of occupancy from your local permitting office. This confirms your new home meets all codes and is legally habitable.

You may also need to get a final appraisal verifying the home is complete as designed and worth at least the total project cost.

8. Refinance or Repay

Now that construction is complete, it is time to resolve the self build loan itself. You have two options:

Pay Off in Full – This option allows you to pay back the entire outstanding loan balance, releasing the lien attached to your property. You can then apply for a traditional mortgage or pay all cash.

Convert to Mortgage – Many lenders let you refinance the construction loan into permanent financing. This transforms the self build loan into a traditional fixed-rate mortgage you repay over 15-30 years.

And just like that – you now own a custom home designed and built according to your unique style, needs and dreams!

Finding the Best Self Build Construction Loan Lender

As you search for financing, keep in mind not all mortgage lenders offer self build construction loans. Specialized experience is critical when it comes to underwriting and funding new home construction projects.

Here are some tips for finding the right lender:

• Search locally – Check with community banks and credit unions in your area first. They may offer self build loans and personalized guidance.

• Ask friends – Speak with anyone you know who has built their own home. Ask who they used for financing.

• Review online – Search for lenders that provide self build loans nationwide and compare offers.

• Verify credentials – Make sure any lender is properly licensed and experienced with construction financing.

• Compare terms – Weigh factors like rates, fees, loan limits and draw schedules.

Finding the perfect lender match can take some shopping around. Be sure to consult multiple options to secure the best rate and terms.

Self Build Construction Loan Costs & Fees

When budgeting for your project, you must account for both construction and financing expenses. Here are common costs associated with self build loans:

• Interest – You pay interest on amounts borrowed during the construction phase. The rate varies by lender.

• Origination fee – Some lenders charge a 1-2% fee calculated on total financing. This covers processing costs.

• Third-party fees – Appraisal, application, credit check and legal fees are common requirements.

• Inspection costs – The lender may charge for each inspection they perform during the build.

• Draw fees – A small fee applied to each draw request can offset administrative expenses.

• Points – You may be able to pay points upfront to lower the interest rate and long-term costs.

When comparing loan options, look at the entire cost of financing. Low rates and minimal fees provide the most savings.

Alternatives to Self Build Construction Loans

Self build loans allow you to finance a new home exactly how you want. But other options exist too. Here are the most common alternatives:

Personal Loans – Unsecured personal loans up to $100,000 are available from online lenders. This capital can supplement savings for smaller projects.

Home Equity Loan – If you have equity available in an existing property, a home equity loan or line of credit can provide funds for construction.

Credit Cards – Many people use cards for purchases during DIY builds. Compare interest rates across any cards you already have.

Manual Underwriting – Some local banks offer custom construction loans completed manually rather than relying on automated underwriting.

203(k) Rehab Loan – This FHA-insured mortgage covers purchasing and renovating a fixer-upper home. Requirements are flexible.

VA Construction Loans – Veterans have access to construction financing backed by the VA. No downpayment is required.

Evaluate both self build loans and these alternatives to determine the most affordable financing method for your unique project.

FAQs About Self Build Construction Loans

Still have some questions? Here are answers to a few frequently asked questions:

How much can I borrow with a self build loan?

Loan limits typically range from $100,000 up to several million dollars. Approved amounts depend on your financial profile and overall project costs.

What credit score do I need?

Most lenders look for a minimum score around 640, but may approve borrowers with credit as low as 600. The higher your score, the better loan terms you can qualify for.

How long does the loan last?

Self build loans feature short 12-month terms in most cases. Borrowers must refinance into permanent financing when construction completes.

Do I need a downpayment?

Yes, expect to put at least 10-20% down for a self build loan. Some lenders may allow as little as 5% down for very well qualified borrowers.

How are funds disbursed?

The lender distributes loan proceeds incrementally based on draw requests tied to specific construction milestones.

Who can be the general contractor?

You can act as your own GC or hire a qualified professional. Experience building homes helps with approval.

How much equity do I need in land?

If using land you already own as collateral, at least 20-30% equity is ideal. Some lenders may accept less.

Can I get a self build loan for a primary residence?

Most lenders only offer these loans for primary residences. Investment properties or second homes typically do not qualify.

How often can I request draws?

The frequency varies, but most lenders allow draws as often as you need capital for continued progress.

The Bottom Line

Self build construction loans provide qualified borrowers with an accessible path to financing a custom home build from the ground up.

If you have the skills and passion for taking on the challenge, the sense of accomplishment and pride you’ll feel when moving into your dream house makes the hard work worthwhile. Just be sure to partner with the right lender that offers flexibility and favorable rates.