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Have you been searching for your dream home on the market and just can’t find it? Why not build it? That’s the case for many homebuyers who decide to go with a construction loan instead of waiting for the perfect home to present itself. The opportunity for personalization, customization, and pride of owning a home that you helped design yourself can be life changing.

Imagine finding the perfect lot in your favorite neighborhood, or undeveloped land tucked in the hills and buying it! Can you see yourself picking out the perfect countertops and flooring like you’re on a home renovation show? Did you ever imagine this was possible with your budget? It can be.

United Federal Credit Union Mortgage Advisor, Nathan Fogelsong says if you’ve been house shopping for a while but haven’t found the right home, you may want to consider a construction loan. For over 30 years, he’s helped more than 1,000 families buy and build homes.

So, what is a construction loan, and how does it work? Let’s break it down step by step.

Benefits of Building Your Own Home

When you build your own home, you’re able to customize it to your style and liking. That includes the flooring, countertops, and more. When the work is completed and you’ve moved into your custom home, built just for you, homeowners can feel a great sense of pride because they made the selections themselves.

Another benefit to building your own home is that you can skip the renovation costs that often come with buying an existing one – since many people end up making changes to make the space feel more comfortable and personal.

How Complicated are Construction Loans, Really?

Fogelsong says, “Once you understand the concept of a construction loan, you understand we’ll do the heavy lifting and tell you what’s going on as far as the finance side. You do the typical stuff, like give us your proof of income. Show us that you have the money for the down payment in your reserves and that you have the credit and you’re able to buy a home.” Homebuyers can apply for a construction-to-permanent-loan, or a construction-only loan, and apply for a permanent mortgage loan after the build is complete.

Fewer Homes on the Market Causes a Housing Shortage

When interest rates are high, many homeowners who want to sell their homes end up holding off and waiting for interest rates to drop, leading to fewer homes on the market. These homeowners may have a mortgage with a low interest rate of 2-3% and are concerned about buying a new home with an interest rate more than double what they currently have. This may lead people to holding off on selling their homes, until rates potentially drop.

So how do you start the construction loan process and begin building your dream home? It starts with finding the lot or land that you want to build on.

Deciding Where to Build: Find a Growing Subdivision

One option that homebuyers have is finding a subdivision that has already started being developed and get a lot loan. Typically, empty lots in these subdivisions will already have an assigned address, sewer, and power connected.

In this case, the homebuyer will buy the lot and make their selection from the options of model homes offered. It’s common for a subdivision to have several model homes for homebuilders to choose from. These models will come with additional options to add on and ways to customize the home to match your needs and style.

Deciding Where to Build: Buy an Empty Lot

Another option that homebuyers have for construction loans is purchasing land that’s outside of a subdivision. This could look like buying land in a rural area without many neighbors around – imagine the peace and quiet!

Homebuyers may decide to get a land loan from United or another financial institution, begin paying off the land and wait a while before getting a construction loan. Or the land loan can be brought into the financing for the main mortgage.

Whichever land buying option the homebuyer decides to go with, they can use a loan to finance it.

Find a Builder and Get a Bid

After you’ve found the lot or land that you want to build on, the next step is to find a builder and get a bid on home construction. It’s important to work with a builder that you trust. You’ll want a builder who will stay on budget, on schedule, and make sure that everything is built to code to pass inspections.

Worried about hiring the wrong builder for the job? United Federal Credit Union will run a background check and pre-approve builders through a system that includes checking references and making sure the builder has experience successfully building houses. This helps homebuyers make smart and informed choices.

Once you hire the builder, they’ll tell you how much it will cost to build your dream home. They will create the building plans that will then be given to an appraiser by the financial institution. It’s common to wait six months to two years before the builder begins construction, so you’ll want to find them as soon as possible to hold your place in line.

So, what happens if the builder spends more money than we agreed on? 

Concerned about unexpected costs sending your build over budget? Many builders purchase and stock up on materials ahead of time. Having materials on hand can help avoid demand increases, shortages, and other causes that may impact the cost of materials. Homebuyers can consider asking the builder if they have materials prepared. In other cases, United can help the homebuyer find a solution that works for them.

Getting a Construction Loan with a Financial Institution

Once you have the bid from the builder and the appraisal, next you’ll take out a construction loan with a financial institution for the total cost of the land and the home build combined. If you already took out a land loan, the financial institution you’re working with can likely roll this into the construction loan to make it one loan.

To secure a construction loan, homebuyers will need to prepare their proof of income, funds, and have their credit checked. Just like with a mortgage loan, they’ll owe a percentage for a down payment that they’ll give the financial institution at the time they take out the loan.

Getting a construction loan with United means you have a team of experts standing with you, that can provide homebuyers with peace of mind. “I have nothing but good things to say about all of my co-workers in the mortgage department at United,” says Fogelsong. “They’re all customer-centric and they’re all wanting to do the very best for people and the very, very best for Members. That’s why they work here. That’s why I came to work here. These guys are the real deal. They know it and they care.”

The Builder Gains Access to the Construction Loan

Once the construction loan is approved and created, the builder will be given access to the funds. Every time they need money for construction costs, the builder can tap into the loan through United’s system and request a draw.

United will set predetermined draw points as different stages of the construction are completed. For example, building the foundation for the home. When that stage is completed, the builder will request the draw, United will verify that the stage has been completed, and approve the draw. The homebuyer will begin paying interest on the amount that the builder draws from the loan.

A Home Inspector Will Approve the Home to be Move-In Ready

Once home construction is completed, the county will inspect the property. Afterward, county officials will provide the financial institution with a certificate, approving the home to be occupied, and give the green flag for the homeowners to move in.

The Construction Loan Turns into a Mortgage Loan

After construction is completed, typically around a year, the homebuyer can decide to turn the construction loan into a permanent loan. The interest rate for the mortgage loan will remain the same as it was when the loan was a construction loan, with the option to refinance later just as you would with a regular mortgage loan. Homebuyers have another mortgage loan option of getting a construction-only loan and applying for a mortgage loan later.

Find Out If a Construction Loan is Right for You

You can start exploring your home building options by seeing what lots are available in your favorite neighborhood and stop by exciting new developments to see what model homes they have. Your local United mortgage team is happy to make an appointment with you to answer your questions and make sure you have everything you need to make an informed decision.

Have questions about construction loans? Make an appointment with your local United mortgage advisor who will walk you through the process from start to finish.

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How a Construction Loan Works: Step by Step Process

1. Buy the land or lot you want
2. Get a bid from a builder
3. Have the financial institution run a background check on the builder
4. Financial institution runs a credit check for a construction loan
5. Show proof of income and proof of funds for the down payment
6. The financial institution will order a home appraisal
7. Get approved for construction loan in the amount of the land + home value
8. Make the down payment
9. Financial institution gives the builder access to the loan and establishes draw points
10. The builder requests draws as the stages of the build are completed
11. After home construction is completed, the county inspects the home
12. County provides the financial institution with a certificate of approval
13. Homebuyer moves in
14. The construction loan changes to a 30-year fixed mortgage with a construction-to-permanent loan. For construction only loans, homebuyer applies for a mortgage loan.