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When you’re building a custom home, you can get a loan to cover the costs, just as you’d get a loan to cover the cost of buying a prebuilt home. However, as your custom home isn’t built yet, it is a riskier loan from the bank’s perspective. You have to jump through more hoops to get a custom home loan, and there are other important differences that you should be aware of before you start.

Secure Your Loan Before You Start

While you may be tempted to shell out money to start your project, it is wiser to make sure that you have your financing secured first. You may need the cash you have to prove that you’re financially healthy enough to get the loan. By spending it, you could undermine your success in getting the construction loan.

Start discussing when you should secure a loan with your builder as soon as possible. Some homeowners choose to purchase their site and create their design first. In fact, you may need to in order to know what kind of loan you need to secure. However, more investment than that is typically inadvisable. While you can resell a plot of land that has little development on it if you don’t get a loan, pouring a foundation will make the site challenging to sell.

Be Prepared for Stringent Requirements

A loan for a custom-built home is a riskier investment for a bank, as they cannot be sure of the final value of your home. While the value may be immense for you, the resale value may not cover the loan, which means that the bank could be out money if you cannot pay your loan. Therefore, banks typically have more stringent requirements for loans for custom builds. You may need a fantastic credit rating, highly secure incomes, and very little debt in order to secure this kind of loan. The requirements will depend on the bank.

Consider Different Banks

You can also prepare to get worse terms on a bank loan for a custom home, because the investment is less secure. You may need a bigger down payment, pay higher interest and have less flexible terms on the loan overall. That’s why you shouldn’t settle for the first bank that you work with. Other banks may have better terms that can help you keep the cost of your loan low, so you can dedicate more to the actual build.

Before You Close the Loan

Once you have your basic loan agreement in front of you, be sure that you understand exactly what it covers. Most loans cover everything in a custom home build except for septic design. Your builder can connect you with a professional to design the septic plan and put the bank at ease.

Smaller Loans

What if you don’t need to cover the entire cost of your new home with a loan? Maybe you have the equity in your existing home or the capital to build most of it yourself. Banks and other financial institutions will also offer smaller loans of $100,000 dollars or so to help you close any gaps between your budget and capital.