The Ultimate Residential Construction Financing Checklist

Building a custom home is an incredibly exciting milestone, but if you’ve never done it before, the financial side can feel a bit mysterious. Unlike a traditional mortgage where you buy an existing house all at once, building a home requires a specialized type of financing called a Construction Loan.

Not all home builds will require the homeowner to obtain a Construction Loan. There may be occurrences when the builder will carry the Construction Loan, and then sells the home to the owner once the build is completed. In this case, all the homeowner will need is a mortgage loan to finance the home purchase.

In the case of the homeowner needing a Construction Loan, we’ve broken down the steps and financial milestones you need to know to help make the process smooth and transparent, based on the experience from our dedicated Residential Construction Lending team. Think of this as your roadmap from empty lot to move-in day!

Before You Start: Know Your Finances

Just like building a house requires a solid foundation, getting a loan requires solid documentation. Before you meet with a lender, you’ll want to gather your “financial footprint.” This helps determine your prequalification amount.

Your Preparation Checklist:

• Proof of Income: Your two most recent paystubs.
• Tax History: W-2 forms and full tax returns from the last two years (include business tax returns if you are self-employed).
• Asset Statements: Recent statements for your checking, savings, and retirement accounts to show your down payment capability and financial reserves.

Pro Tip: Once you decide to build, put a strict freeze on major financial changes. Avoid buying a new car, making large purchases on credit, or opening new credit cards. Sudden changes can negatively impact your credit score and disrupt your loan approval.

The 5 Steps of the Home Building Process

Once your paperwork is ready, the construction financing journey unfolds in five distinct phases:

Your first step is sitting down for a consultation with a loan officer who will look at your financial picture and help you map out a strategy for three distinct things: your lot loan (if you don’t own land yet), your construction loan, and your ultimate permanent mortgage.

This is where your vision gets down on paper. Your builder will provide the final blueprints, material specifications, construction budget, and signed contract to the bank. The bank will order an appraisal. Because the house doesn’t exist yet, the appraiser estimates what the home will be worth based on those plans and specs. This step usually takes a few weeks.

Time to sign the paperwork! How this looks depends on your timeline:

• If you’re waiting to build, you will close on a lot loan to secure the land.
• If you’re ready to build immediately, you will close on the construction loan. If you don’t own the land yet, a portion of this loan will automatically go toward buying the lot at closing.

A construction loan doesn’t hand you a massive check all at once. Instead, it functions like a giant line of credit. You only pay monthly interest on the funds that have actually been spent.

Every month, your builder will request a draw (a payout) to cover the work completed so far. To protect you, a careful monitoring system takes place:

• Your loan officer reviews the draw request against the builder’s original budget.
• An independent monthly on-site inspection verifies the work has actually been done.
• A title company checks for any unexpected construction liens and pays subcontractors directly to keep the project legally clear.

When the paint is dry and the final inspection is passed, it’s time to move out of temporary construction phase. Your construction loan is refinanced into a permanent mortgage, typically a 15, 20 or 30-year fixed loan.

Bonus Tip: Building takes time, and interest rates fluctuate. Ask your lender about extended rate locks that let you secure your permanent mortgage interest rate up to 9 months in advance, protecting you from market spikes while your home is being built.

Ready to Lay the First Brick?

Building a home is a massive undertaking, but with the right team in your corner, it doesn’t have to be overwhelming. If you’re ready to take the first step toward building your dream home, reach out to one of our Residential Construction lenders.