5 Things to Know About How to Finance Building Your Own Home


So, you’re tired of renting and you’re ready to take the plunge into homeownership.

You could always buy an existing home, but that won’t give you the freedom that you’re looking for. You want to call the shots, handpick every aspect of your new home, down to the smallest detail.

Well, what you need is to build your own home! Unfortunately, it’s not quite as simple as deciding to do so.

First, you need to learn how to finance building your own home. Because unless you have hundreds of thousands of dollars lying around (and good for you if you do!), you’re going to need a loan.

To learn everything you need to know about financing your home build so you can get started on your dream home as soon as possible, just keep reading!

1. A Conventional Mortgage Won’t Work

The first thing to note with financing a home build is that a conventional mortgage won’t work. A conventional mortgage is meant for those purchasing an existing home, lenders won’t give these out to those building a home.

This might seem unfair, but it’s to protect the lender. Construction is risky; the process rarely goes entirely to plan and it’s possible for it to go horribly wrong. Not to mention, lenders aren’t big fans of giving out home loans for homes that don’t exist yet.

2. Take Out a Construction Loan

Don’t worry! There are options meant for those building a home. These are called construction loans, otherwise known as self-build loans or construction mortgages.

Now, construction loans aren’t the same as a traditional mortgage. Rather than a 30-year timespan, they’re typically for a single year only, meaning you have to pay for the price of your home build within that year.

While your home is being built, you’ll pay installments on a schedule set by your lender. You’ll only owe interest until the home is complete, at which point you’ll need to start paying the remainder.

These loans often have higher variable rates than traditional mortgages, but there’s good news! Once your home is complete, you can refinance the construction loan into a traditional mortgage or use an end loan to pay off the construction loan.

3. Prepare for the Loan Application in Advance

Let’s talk about preparing for your construction loan application. Because while lenders do give these out to people building their own homes, it’s not quite as easy as to get as other types of mortgages (and who would say getting any type of mortgage is easy?).

There will be a variety of hoops you have to jump through to prove that your build is viable and presents minimal risk to the lender.

Each lender has its own set of rules, but there are a few things you’re almost certain to be required to provide.

First, you’ll need a project timetable and a realistic budget. You’ll also need a complete list of construction details, including your floor plan and building materials. If you don’t yet have a completed floor plan, take a look at these casita house plans for inspiration!

Your builder should not only help you create your floor plans but the required list as well, as it needs to be extremely detailed. Talk to your builder about their blue book for your home. This is a compilation of details for your specific home-building project.

4. Gather a Down Payment

The preferred down payment amount on a traditional mortgage is 20%; however, with good credit and a steady income, it’s not necessary to get the loan.

That isn’t the case with construction loans. With this type of loan, that hefty down payment is a requirement. It can even be higher, up to 25% of your total loan.

This is because financing construction requires lenders to take a much greater risk than they would for an existing home. You could walk away from the project at any time, and lenders want to protect themselves.

Because the down payment is so high, and the construction mortgage is so demanding, one of the best financing tips we can give you is to do your best to pay for your land upfront.

If you don’t already own the land when you apply for a construction loan, the cost of the land will be included in the overall loan amount. This will make your down payment and subsequent payments even higher.

5. Find a Qualified Builder

As we already discussed, obtaining a construction loan is no easy task. Part of the approval process includes proving that you have a qualified builder lined up for the project. This means an individual with a general contractor’s license and a history of home-building success.

This individual can be you or someone related to you, as long as you (or they) are experienced, licensed, and insured.

If you’re unable to provide a portfolio of experience but still want to build your own home, you can try for an owner-builder construction loan instead. Though these are even tougher to get than a standard construction loan, it’s not impossible.

Those who choose this route will need a well-researched construction plan and an ability to demonstrate home-building knowledge and skill.

Learn How to Finance Building Your Own Home to Get Your Dream Home

When you have a dream home in mind, there’s no better option than building a home. Buying an existing home will always come with sacrifices. When you work with a contractor to build your own, you can add all the little details your heart desires.

Now that you know how to finance building your own home, you’re one step closer to turning your dream home into a reality! All that’s left is to organize your plans and apply for a loan.

If you’re in need of home build inspiration, we’ve got you covered! Take a look at our blog for articles on everything from features to include in your build to home decor tips.

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