How to Finance the Building of Your New Home: Your Complete Guide

Building your own home is exciting and at the same time can be a challenging project. It allows you to customize every detail to fit your preferences and lifestyle, turning a plot of land into your perfect home. However, it requires careful planning and decision-making, especially regarding budget and construction.

In this comprehensive guide, we'll walk you through every essential step of financing your home, ensuring you're equipped with the knowledge and strategies to navigate the process smoothly. No matter if you're a first- or second-time homebuilder, this article can serve as your roadmap to creating a space that's truly your own.

Building vs. Buying a Home

When considering a place to live, you have two primary options: building a new home or buying an existing one. Each choice offers distinct advantages and processes that cater to different preferences and needs: 

Whether you decide to build or buy, each path of homeownership has its own set of benefits and challenges. Talk to your mortgage loan officer to discuss which option is right for you based on your timeline, budget and priorities.

6 Steps to Finance Your Own Home

Whether you're a first-time homebuilder or a seasoned pro looking to build another home, here are the six crucial steps to building your own home so you can manage the project efficiently:

1. Get Pre-Approved 

First and foremost, you’ll want to get a pre-approval letter. You’ll also want to find a knowledgeable construction lender who has experience in financing the construction of new homes at this stage. Your trusted partner should answer your questions and a pre-approval ensures you understand what you can afford and helps lay a solid foundation for your construction project. 

2. Plan your budget

Be proactive in creating a budget to ensure you don’t overspend. Leave yourself some “financial breathing room” as new construction projects can often cost more than expected. Savings reserves are helpful should you encounter cost overages during the build process. 

3. Choose Financing

There are multiple options to choose from to finance your dream home. Your home will be financed on a schedule based upon completion of each stage of building, which can be up to 11 months. During the construction financing process, you’ll make interest only payments based on how much of the construction funds have been drawn to date. 

Here at Johnson Financial Group, we offer many financing options to help you build your ideal home:

One-time Close Construction Loans

This is a combined construction and permanent loan financing option that can save you time and money. You’ll enjoy the convenience of one loan, one application and one closing date. One-time close construction loans also provide low down payment options and the option to lock your rate up to 180 days prior to the final draw being made. Something to keep in mind is that the maximum loan amount is $766,550, so if you’re in need of a larger loan, you may want to consider a Portfolio Jumbo Construction loan.

Portfolio Jumbo Construction Loans

Our portfolio construction loans provide financing options for homeowners that have high value construction projects that exceed conforming loan amounts. Their Loan-to-Values (LTVs) vary, with loan amounts available up to $3,000,000. Portfolio jumbo construction loans have long-term fixed rates or adjustable–rate mortgage (ARMs) options.

Lot Loan Financing

A lot loan allows you to purchase land before you start construction. Once you’re ready to build, your lot loan can be financed as part of the construction loan. With our lot loans, you can finance up to 20 acres and use balloon payment options with longer amortizations.

Turn-Key Mortgage Financing

In turn-key financing, the builder is responsible for the cost of construction. The homeowner finances the purchase of the new home when construction is complete and they are handed the key. Turn-key mortgages are reserved for faster projects, around four to six months long, and provide less stress and money obligations while your home is being built.

Not sure which financing option is right for you? Meet with a mortgage lender and discuss these three important questions.

4. Choose your lot or building site

Make sure the lot you plan to purchase can accommodate your new home. The dimensions, pitch and location can all factor into the size and type of home you want to build. Regardless of the location you desire, you’ll almost always need to choose the land before you begin the design phase. In some cases, the complexity of the building site (steep terrain, remote locations, undeveloped land, etc.) may directly impact the cost of the project.

Already own your lot? You may be able to use the existing equity in your lot toward the down payment required on the construction loan.

5. Select a builder

Learn about the builders and contractors in your area by reviewing local builders’ associations, attending home builder shows, talking to vendors, reading online reviews and participating in seminars. Here’s a step-by-step framework to finding the perfect builder for your needs:

• Ask for references from family and friends. 
• Ask for references of sub-contractors or suppliers the contractor works with and review their payment record. 
• Request a copy of the contractor’s insurance policy to understand the unique coverage. 
• Review the construction bids, including the scope of the project, references, time frames and price. 

6. Build your home

Once you have your plans, permits and materials ready, the actual construction of your home begins. This phase involves a series of steps starting with laying the foundation, framing the structure and installing the roofing and windows. Skilled tradespeople such as carpenters, electricians and plumbers will work in coordination to ensure that every aspect of the building meets both your specifications and the local building codes. Regular inspections are typically conducted at various stages of construction to ensure compliance and safety standards are met.

As the building progresses, interior elements like insulation, drywall and flooring are added, followed by fixtures and finishes. This final step is both exciting and intensive, as you see your home gradually take shape.

Building your own home is a rewarding journey. While the financing process can seem overwhelming at times, armed with the right knowledge and resources, you can navigate the complexities with confidence. Connect with a mortgage loan officer to answer any questions and get started on your homebuilding journey today.