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Construction Loan Financing Options When You Build On Your Lot

June 28, 2019

You’ve made the decision to build a new home and you have exactly the land in mind. Great! Now what? Well, depending on the land and the builder, you need to review your construction loan financing options when you build on your lot. McGuinn Hybrid Homes has a lot of experience in building beyond our communities, so we’re sharing answers here to the frequently asked questions about this topic.

Is a construction loan the same as a mortgage?

No. A construction loan is a short-term loan (usually 12 months) that covers the cost of building your home. It’s not a mortgage. When the home is done, you convert that loan to a mortgage, also known as an end loan. You can also use it to purchase the land as well as build. 

Do you need a construction loan?

You only need to secure a construction loan when you are building a home on undeveloped land—like outside of a developed neighborhood—or on land that is owned by you. If you are having a home built within a neighborhood, the land is usually bundled into the price of the home, so you don’t need a construction loan.

What does it take to qualify for a construction loan?

Lenders will look carefully at the credentials of the builder you’ve hired. Some of them are more reputable than others. This is for your protection! You don’t want the term of your loan to end before the construction is completed, and you certainly don’t want a home that isn’t of high quality.

Also, be advised that although you can act as your own contractor, banks are often leery of that situation, unless you are actually qualified to do so. Trying to save money by taking on this role can be challenging. If you don’t have relationships with subcontractors, you might find it difficult to get the work done in a timely and acceptable manner.

The lender will also want to appraise the home you plan to build, to ensure that its value meets expectations. They will not finance a home that they believe exceeds the appraised value.

You should also plan to provide at least a 3.5% down payment on a construction loan, but there are varying programs out there. If you already own the land where you’re planning to build, you can use that as collateral.

What if my home isn’t completed in 12 months?

This is another reason you need to hire a reputable builder. If your home is delayed beyond the term of the construction loan, you might have to apply for an extension and pay an additional fee. 

Will I pay closing costs on both the construction loan and the mortgage?

In most cases, you will. They are considered two separate loans. There is another option, however. Ask the lender about a single-closing loan. In this program, the construction loan automatically converts to the mortgage when the home is done and ready for occupancy. This type of loan structure eliminates having to pay closing costs twice. Some banks will credit the closing costs of the construction loan toward the mortgage, so be sure to ask if this option is available.

McGuinn Hybrid Homes will build a home on your lot and provide you with the quality, communication, and value that you expect. We provide a detailed cost and stick with it! There are no surprises or changes, unless you decide to change the plan. We build in locations through the Columbia, SC, area: Newberry, Winnsboro, St. Matthews, Orangeburg, Neeses, Wagener, Sumter, Aiken, Ridge Springs, Chapin, Elgin, Lugoff Ridgeway, Pomaria, Prosperity, Cayce, Gilbert, Gaston, Swansea, North Livingston, Pelion, Perry, Eastover, Little Mountain, Leesville/Batesburg, Cordova, Rowesville, West Columbia, Irmo, and Blythewood.

Before you decide on where to build your new home, browse our communities and move-in ready homes for sale right now. You might find exactly what you’re looking for and be able to avoid a construction loan altogether. Contact McGuinn Hybrid Homes to get the full story on building a new home.

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