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How to Finance a Home Construction


If you’re nearing retirement (whether from military service or your civilian job) and ready for your “forever” home, you may be deciding if you should buy or build.

There’s an obvious upside to building your own home: you choose when to build, you can have everything you’ve ever wanted (and can afford) — from the layout, cabinets and flooring to the sinks, lighting, paint colors and even doorknobs!

“You can get it exactly the way you want it, built in the exact location and manner you’ve always wanted,” explains Kevin R. Crooks, a Branch Manager for AAFMAA Mortgage Services LLC (AMS) in Wilmington, North Carolina.

New homes may also offer energy-saving features like tankless water heaters, solar panels, and energy-efficient appliances. New homes will meet current building codes and can come pre-wired for “smart” technologies. Plus, if the new roof leaks or a pipe bursts, it’s probably covered by the builder for a certain period of time. Always ask about any warranties offered by the builder.

The downside? You won’t be able to move in right away. According to the National Association of Realtors, it typically takes from four to six months to build a house — and that’s not accounting for bad weather, material shortages, or contractor delays.

How Much Will It Cost?

Building a home from scratch can cost a little more, depending on the home designs you’re considering, the land cost, and other factors.

The National Association of Home Builders says the average cost to build is $217,760, with 55.6% of the final sales price going to construction costs, 21.5% to finished lot costs, and 10.7% to builder profit. Construction costs include all the costs paid by a builder, including materials, labor and subcontractors.

Using Zillow data from the same year (2017), the average existing home sold for $199,200.

Construction Financing

Unfortunately, a home under construction won’t qualify for a traditional mortgage. You’ll have to pay cash, use builder financing (which might have lots of hidden costs), or find a lender like AAFMAA Mortgage Services LLC (AMS) that offers construction loans to qualified servicemembers and Veterans.

A construction loan is used to finance the construction of a home, and when the construction is complete, the loan is refinanced into a permanent mortgage loan. 

“By getting your own financing, with a construction loan, you can often save money over builder financing because the builder is not carrying the risk,” says Crooks.

A construction loan works more like a line of credit than a mortgage. Instead of the seller, in this case the builder, getting all of the money at once, you only draw what you need, and interest is only charged on the amount drawn. “The balance starts very low and then as the home is completed, the builder is reimbursed for the work that they’ve done,” Crooks explains. “So basically throughout the life of the construction loan the balance increases.”

Because of increased risk, the interest charged on construction loans may be higher than traditional permanent mortgages. “But during construction you’re making interest-only payments on the amount you’ve borrowed. So it’s a lower carrying cost for the borrower,” he adds.

The term for construction loans is usually 12 months, but extensions are available. Because the lender organization has limited surety, they generally insist on evaluating your finances and credit, inspecting your plans, and using an accredited builder.

Upon completion, an inspector checks the building for compliance to the plan and to local ordinances. “At that point, we would do a refinance to pay off the construction loan,” says Crooks. The new loan, subject to credit approval, could be a VA Home Loan, conventional, or FHA mortgage.

One unique feature of using AMS for a construction loan is that when determining your loan-to-value ratio (LTV), AMS uses the appraised value of the home, including the equity in the lot, whereas other lenders might only use the cost of the home. “If the home appraises for more than the cost, that overage can be used by the homeowner as part, or all, of their down payment, reducing their out-of-pocket costs,” says Crooks.

We’re Here to Help

If you’d like to learn more about construction loans, please contact us today. You will receive an honest and fair comparison of your mortgage options, including a wide range of low-rate and low-cost mortgages designed to meet your needs. Ensuring you obtain the best mortgage possible is our mission.