Getting A Mortgage When Building Your Own Home

Whether youre an adventurous person, a DIY expert or simply a persnickety home buyer, the thought of building your own home might be a thrilling prospect. After all, when you choose to build your own abode, you get to call all the shots. That means you can determine the precise layout, dictate the exact number and type of rooms, handpick all the finishes and even add an indoor pool, an aquarium wall or a stairway slide, for that matter. Perhaps thats why 27% of surveyed home buyers custom-built their own home, according to a 2013 National Association of Home Builders (NAHB) Research Center survey (see Should You Buy Or Build A Home?).

While building a one-of-a-kind home from the ground up may sound exciting, financing such a major undertaking is an entirely different story. Obviously, the majority of home buyers dont have enough money tucked away to cover the construction costs of their custom home which means theyre going to need a loan. Unfortunately, landing a loan for a self-build project is easier said than done.

If youre considering building your own home, here are a few things to keep in mind as you search for a loan.

For buyers purchasing an existing home, its relatively easy to get approved for a conventional mortgage, as long as they have good credit and reliable income. On the other hand, its virtually impossible to score traditional financing when youre building your own home. Why? Think of it this way: Youre basically asking the lender to shell out money for something doesnt exist yet. To make matters worse, construction is a risky process, and lenders dont like risk.

If you plan to self-build, youll need to pursue more specialized financing avenues. Enter the construction loan. Sometimes called a self-build loan, a construction loan is typically a short-term loan (usually one-year maximum) used to cover the cost of building your home.

These loans generally have variable rates that are higher than traditional mortgage loan rates. Once construction on your house is completed, you can either refinance the construction loan into a permanent mortgage or get a new loan to pay off the construction loan (sometimes called the end loan.)

As you gear up to apply for a construction loan, you should probably do some serious stretching. These loans require a ton of legwork on the borrowers part. Youll need to jump through numerous hoops to prove your home-building project is real, viable and relatively low-risk for the lender.

For most construction loan applications, youll need to provide the lender with a project timetable and a realistic budget. Youll also need to supply a comprehensive list of construction details, including everything from floor plans and the type of building materials to insulation and ceiling heights. (Experienced builders typically create a blue book that includes all of these details for a home-building project.)

At a minimum, most lenders require a 20% down payment on a construction loan, and some require as much as 25%. Why are the down payment requirements so high? Because construction loans are viewed as higher risk than a traditional mortgage loan, and the lender wants to ensure you dont walk away from the project.

If you dont already own the lot where you plan to build, the cost of the land will need to be included in the overall amount of the construction loan. If its financially possible, try to pay for the land upfront. Otherwise, youre going to have make a much larger down payment to qualify for the construction loan.

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Getting A Mortgage When Building Your Own Home