How to finance building a new home: a step-by-step guide

New home construction can be an exciting process. Your new home will be constructed to reflect the way you want to live, whether that means a custom design or a builder’s pre-existing plan. To make it happen, you’ll need a clear plan that covers everything from breaking ground to moving in. 

Finding the right architect, builder or contractor is an important part of the process. You’ll also need a budget that accurately reflects your costs and a lender who can guide you through the construction loan process step by step, oversee the disbursement of funds, coordinate with your contractor and help you manage the transition to a traditional mortgage once construction is complete. 

The process includes several moving parts, which is why we’ve broken down home construction financing into six clear steps. From building a realistic budget to choosing the right type of construction loan and assembling the right team, these steps can help you move forward with confidence before construction begins.   

Step 1: Start with a realistic budget

When considering how to finance new home construction, it’s important to account for both hard and soft costs. Hard costs include buying the land and preparing it for construction, which may include permits, land grading and utility connections, along with building materials. Soft costs may include insurance, inspections and taxes. A good rule of thumb is to include an additional 10% to 15% in your budget to allow for flexibility as the project moves forward. 

The cost of buying land is typically included in a construction-to-permanent loan and, in some cases, may roll into your permanent mortgage once construction is complete. Your lender can walk you through your options, but it’s best to have financing in place before construction begins. Even if you plan to cover part of the cost out of pocket, lenders generally prefer to finance projects from the start. 

Some builders offer all-in-one design packages that include everything from plans through completion. These packages can simplify decision-making and help provide clearer cost expectations early in the process.   

Step 2: Understand how construction loans work

With new home construction financing, your funds are distributed in “draws” based on project milestones so you can keep up with payments to your contractor. One of the key benefits of custom home financing is that you would make interest-only payments during the construction phase, which helps make them more affordable. When construction is completed, your construction loan typically converts into a regular mortgage.  

Step 3: Choose the right type of construction loan

You have two main options for home construction loans. One is a construction-to-permanent loan, where you’ll make interest-only payments while your home is being built. Once finished, the loan converts to a traditional mortgage.  

The other option requires two loans. The first phase uses a construction-only loan, a type of bridge loan that funds construction during a 6-to-12-month period. After the construction is complete, the total loan balance is due. This can be either paid off in full, or by taking out a traditional mortgage to cover the balance.  

Either option brings you to the same place, with a newly built home and a conventional mortgage. There are pros and cons to either option for a construction loan, and your lender can help you consider your options to find one that fits your timeline and goals. 

Step 4: Assemble your team early

Before applying for a construction loan, you’ll need to have your documentation and professionals in place. Lenders typically require a licensed and insured general contractor before approving a construction loan. 

Clear communication with your builder about budget and timing is essential. Working with experienced professionals can help keep the project moving smoothly, as seasoned builders are familiar with the construction lending process and the documentation lenders require to release funds during each phase. 

Step 5: Know what to expect from the draw process

With a construction loan, your funds are disbursed in phases as the build progresses. Most lenders require an inspection before they release more funds, to make sure the project is progressing as planned and conforms to building codes. It’s important to maintain open communication between your builder and the lender to ensure inspections are scheduled on time, delays or changes are addressed, so each draw on your loan is processed smoothly. 

Step 6: Plan for the final mortgage conversion

With a construction-to-permanent loan, the construction phase seamlessly converts to your permanent mortgage upon completion, often with just one closing and a locked-in rate from the start. For a construction-only loan, you’ll apply for a separate permanent mortgage afterward, which typically requires a fresh financial review to confirm your eligibility. Your lender will guide you on the exact timing, required documentation and any steps to ensure a smooth transition..

Build with confidence

Ready to take the next steps? Talk to one of our at-your-service mortgage loan officers today. You’ll gain additional guidance to make informed choices and become a more confident homebuilder. They’ll work at your pace and through every question as you explore your options.