How Construction Mortgages Work
For those wishing to construct and in need of a mortgage to facilitate this, I have many options. I am experienced in dealing with professional builders and self-builders alike, and I have an extensive network of both institutional and private construction lenders. A construction mortgage works differently from a standard purchase - the lender releases funds in stages (called draws) as construction milestones are completed.
You only pay interest on the funds that have been advanced, which keeps carrying costs manageable during the build. Once construction is complete, the mortgage converts to a standard term mortgage and you begin making regular principal and interest payments.
- Funds released in stages as construction progresses
- Interest-only during the build period
- An inspector (at the lender’s expense) confirms each milestone before draws are released
- Typically requires a 20 to 25% down payment on the projected completed value
- A cost overrun contingency of 10 to 15% is recommended
Owner-Builder vs. Licensed Contractor
If you’re hiring a licensed general contractor to build your home, most lenders will work with you without issue. If you plan to act as your own general contractor (owner-builder), the pool of lenders shrinks considerably - most major banks won’t touch an owner-builder project. There are lenders that will, but it requires more documentation, a detailed project plan, and often a higher down payment.
I’ll tell you upfront which path is viable for your situation and connect you with lenders that have experience with the type of project you’re building - whether that’s a custom single-family home, a small multi-unit, or a modular/prefab build.
Land Loans and Vacant Property
Buying raw land - without an existing structure on it - is considered higher risk by most lenders. Unlike a home, land doesn’t produce income, it can’t be lived in, and it’s harder to sell quickly in a downturn. As a result, you’ll typically need a larger down payment (35 to 50% is common) and the interest rate will be higher than on a standard residential mortgage.
That said, many of the same lenders I deal with on construction mortgages will also lend on the land value initially for a purchase. They can then convert the loan into a construction draw mortgage at a later date. A well-executed strategy can save you thousands in interest, legal, and lender fees.
Planning the Financing Before You Break Ground
These loans are quite complex and I can provide you with some valuable insight into how lenders will view your upcoming project. You’ll need building permits, architectural plans or a builder’s contract, and a detailed cost breakdown before a lender will commit to the full mortgage amount. The sooner you contact me, the better - ideally before you’ve committed to a lot or signed a build contract.
If you are interested in building on a property you already own, or wish to purchase a property in order to construct a new home, I can go over the numbers with you and connect you with the right lenders for your specific project.