Understanding the home construction process

A Hispanic family with a 3-year-old daughter, at the construction site where their new home is being built. They are smiling and looking at the camera, the couple holding their child between them, excited that they will soon be home owners.

New to the home buying process? A construction loan will help get you started on the journey to your dream home.

Building that perfect home you’ve sketched on napkins for years can be an exciting, yet stressful experience, particularly if it is your first time building a home.

Lots of decisions play into making your experience a positive one: choosing the right floor plan, the location, the builder, the unending design choices, to name a few. But without construction financing, none of those decisions will be necessary.

Constructions loans work differently than mortgages. A construction loan is a short-term — no more than 12 months — financial commitment by a lender to finance the cost of building a home. This loan often includes the cost of acquiring the lot.

You can expect to pay a portion of the funds, usually 10 percent to 20 percent, as equity. By doing this, the homeowner is sharing in the risk of the project with the lender and builder. Construction loan rates are typically variable and adjust with the prime rate.