Understanding New Home Construction Loans

Understanding New Home Construction Loans

When you’ve decided that the time is right for a new home, it’s exciting and nerve-wracking.

When you’ve decided that the time is right for a new home, it’s exciting and nerve-wracking. There are so many different decisions to make, but the first is often are you going to buy an existing home or work with a custom home builder. If you go the custom built route, your financing options will be different than a regular mortgage. This is because a regular mortgage uses the existing home as collateral for the loan. With a custom built home, you need the loan long before there is a house there to be collateral.


The construction-to-permanent loan is also called the “single close” construction loan. This loan will cover the construction costs by paying out in stages as the work is completed over the term of the loan (usually about a year). These payouts are called draws, and your payments in between are only towards the interest on what has been drawn so far. For instance, if the first phase of your project (buying the lot and pouring the foundation) costs $50,000, your bank will pay the builder that amount and you will only pay on that amount while the work is being completed. Once that phase of work is done, your bank will pay the builder the next draw for the next phase of work, and so on till the project is completed. During this process, the lender will also do periodic inspections to make sure the work is going as planned. Once the work is done and you move in, your loan rolls over into a mortgage. With this type of loan, you only pay closing costs once, but you should expect to have to put up 20% of your total project cost as your down payment.


A construction-only loan covers the full amount of your project up front, like any other type of loan, so you have to pay closing costs on it when you take it out. Once the construction is completed, you roll that construction loan into a regular mortgage on your new custom home. This is considered a second loan, so you pay closing costs again. Construction-only loans usually don’t require a large down payment, if they require one at all, because they use your current home as collateral. If you’re not sure which mortgage lender you want to go with, this is a good option that will allow you to shop around without postponing building.

Contact Homeland Builders, LLC Today!

Homeland Builders is honored to help you build your dreams. We proudly serve the custom home needs of families throughout Anne Arundel County, Calvert County, Queen Anne’s County, Prince George’s County, Saint Mary’s County, Montgomery County, and Howard County. If you’re located in Maryland and have a vision for the perfect home for you and your family, don’t hesitate to give us a call at 443-336-1164 or email us at vincemazza@homelandbuildersllc.com today, and we will be happy to answer all of your home building questions. Let us provide you with our complimentary consultation to discuss your project design and budgeting requirements.

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This entry was posted on Friday, February 1st, 2019 at 4:00 pm. Both comments and pings are currently closed.