How Custom Construction Mortgage Loans Work

Although the thought of building a new home is an idea that appeals to a lot of people, many don’t explore the idea due to not understanding how the loan process for custom construction loans (also referred to as all-in-one loans) work. Here are some of the misconceptions we have heard:

  • “Since the new home isn’t built and move-in ready, I still have to live in my current home and the bank won’t loan me money for two homes at once.”
  • “I don’t want to have to move into a rental while my home is being built.”
  • “I don’t have the cash to pay for the new home.”

We understand. There are a lot of details that go into the process of financing and building your new home! Here are some basics on new construction loans:

  • Preliminary Research: Two things should happen before you make a decision to build a custom home. First, meet with a qualified lender who is experienced in Custom Construction financing. They will answer any questions and explain the qualification and loan process and assess your personal and financial information just like any other type of loan. They will provided you with preliminary numbers, fees, percentages etc. based on a price point you envision spending on the build. It is best to be well prepared with a lender before entering an agreement with a builder-in fact most builders will require proof of such beforehand.  Next, identify the builder who best fits your needs.  Inquire about their local experience, their reputation with both consumers and industry peers, ask to see past projects or to speak to past clients. It’s paramount that you feel comfortable with the builder and their team, and have confidence in their ability to see your project through to satisfactory completion.
  • The Agreement: After working with your builder and their team to finalize the home-site plan, the floor plan, and all other specifications and details for the home, you will enter into a Fixed Price Agreement. This agreement has many parts to it including the detailed scope of work and specifications the home will be built to, final construction plans (blueprints), pricing, warranty information and other contractual terms. This agreement is a valuable tool ensuring a seamless building experience and reducing the risk of surprises along the way.
  • Approval: Once the agreement is put in place between you and the builder it goes to the lender along with any other information needed for them to process the loan approval and complete the appraisal. When the loan is fully approved, the builder can start the process of constructing your home. Throughout the construction process the builder will submit progress reports to you and the lender. These reports will outline completed work which is then inspected by the lender for completeness and signed off on by you and the lender.  Funds assigned for the line items listed on the progress report are then released to the builder in what is commonly referred to as a “draw”. Progress reports are done (usually monthly) until the construction is complete and the city or county completes a final inspection and issues a Certificate of Occupancy permit for the home. The builder is then granted his final draw of funds.
  • Repayment: Construction loan programs differ by lender. More often than not the buyer is required to provide 10%-20% of the loan amount as a down payment. It’s also common for lenders to require that the buyer make interest payments on the balance of the loan during the construction period. Some lenders have streamlined the “closing” process of construction loans to allow for a single closing, before the construction even begins. The loan is in place and interest rates of that time are assigned and the building process begins. There is no more loan paperwork to sign or funds to bring in when the home is complete since it was all done in the beginning. At build completion, the balance is amortized over the life of the loan and payments are made just like any other type of loan.

Each lender’s program has different details, parameters and requirements. When you work with Devoted Builders, rest assured our team has great working relationships with the most qualified local lenders. Based on our experience we can refer you to the right lender to best meet your specific needs.

For additional information on this matter or to learn more about our Sundance Estates project in Richland, reach out! Call Jennifer Cowgill at (509) 947-5670 or Jessica Johnson at (509) 947-2230 or contact us at

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