How to Finance Building Your Own Home

For buyers who want to build rather than buy, construction loans offer a path from empty lot to finished home. Not only that, but they can cover everything from land and permits to materials and labor.

Construction-to-permanent loans are the most common choice, but construction-only loans are also available. Here’s a look at construction loan options and how they work.

Construction-to-Permanent (C2P) Loans

This option funds construction for a fixed term, typically 6 to 18 months. Repayment begins during construction, but payments are made on interest only. Once the project is complete, the loan automatically converts to a traditional 15- to 30-year mortgage, and payments apply toward both interest and principal.

One application and a single set of closing costs can save thousands in duplicate fees.

Construction-Only Loans

Like C2P loans, construction-only loans provide funding for the same fixed term with interest-only payments. But once construction is complete, there is no automatic conversion. You either pay off the loan in a lump sum or secure new, traditional financing.

Construction-only loans offer flexibility on the permanent financing side — you choose your end loan once construction wraps up. The trade-off: you’ll need to qualify twice and cover two sets of closing costs.

Qualifying and Funding

Like traditional mortgages, construction loans require documentation of assets, income and debt. Rates are typically higher due to greater risk to the lender, and a 20% to 25% down payment may be required. Construction loans also require the submission of construction plans, including project timelines and budgets.

Unlike traditional mortgages, funds are disbursed in stages instead of one lump-sum transfer. Builders make draws in installments at key stages of construction, with inspections required for draw approval. Payments are tied to actual progress.

Planning on buying or building your dream home? Reach out if you have any questions about financing.