Have you ever dreamed about building your perfect home from the ground up?
Many homebuyers choose to go the new construction route to create a house that fits exactly what they want. However, construction financing can take a different approach than a traditional mortgage loan. Peregrine Financial is an expert mortgage lender in Santa Clarita that can walk you through what a new construction loan is, how it works, and how to qualify for one.
What Is a New Construction Loan?
A new construction loan is a type of short-term financing for a construction project, designed to cover the costs of building a new home. Unlike a traditional mortgage, which provides a lump sum to purchase an existing property, a construction only loan disburses funds in phases as the home is built. Once construction is complete, the loan is typically converted into a permanent mortgage, or the borrower takes out a separate mortgage to pay off the construction loan.
A new construction loan is designed to fund the construction of a new residential property. A new standalone construction loan is designed to close with the completion of a new home build. They are similar to purchase mortgages in terms of documentation and requirements but require a longer lock period of several months so the builder can finish the project.
Types of New Construction Loans
There are a few different types of construction loans available, each with unique benefits and requirements:
Construction-to-Permanent Loan - This loan starts as a construction loan and automatically converts into a traditional mortgage once the home is finished. It simplifies the financing process and eliminates the need for a second closing.
Stand-Alone Construction Loan - This is a short-term loan that covers only the construction phase. Once the home is built, the borrower must secure a separate mortgage to pay off the construction loan.
Owner-Builder Loan - If you plan to act as your own general contractor, some lenders offer owner-builder loans. However, these require strong experience in home construction and are not commonly approved for first-time builders.
Renovation Construction Loan - If you’re planning to significantly remodel an existing home rather than build from scratch, a renovation construction loan can help finance major upgrades.
How to Qualify for a New Construction Loan
Because USDA construction loans carry more risk for lenders than traditional mortgages, construction loan requirements can be more challenging. Here’s what lenders typically look for:
Good Credit Score: Most lenders require a credit score of at least 680, though higher scores improve your chances of approval and better terms.
Stable Income: You’ll need to provide proof of consistent income and employment history to show you can make principal and interest payments on the home construction loan.
Low Debt-to-Income Ratio (DTI): Lenders prefer a DTI ratio below 45% to ensure you can handle additional debt and corresponding interest rate.
Detailed Construction Plans: Lenders require detailed blueprints, construction timelines, and a budget to assess feasibility.
Minimum Down Payment and Closing Costs: Construction loans typically require a down payment of 20% to 25% since they are riskier for lenders.
Qualified Builder Approval: Most lenders require that you work with a licensed and experienced builder to ensure the project is completed professionally.
Steps to Getting a New Construction Loan
Get Pre-Approved - Before breaking ground, get pre-approved for a construction loan. This will help you determine your budget and give you an idea of the loan terms available to you.
Choose a Reputable Builder - Since lenders require that a professional builder oversee the project, research and choose a licensed contractor with a solid track record of completing homes on time and within budget.
Develop Detailed Construction Plans - You’ll need to submit blueprints, a construction timeline, and a breakdown of costs. The more detailed the plan, the smoother the approval process.
Apply for the Loan - Once you’ve chosen a builder and finalized plans, submit a formal application with financial documents, construction details, and contractor agreements. Ask about interest-only payments.
Undergo the Appraisal Process - Lenders will assess the future value of the completed home based on the plans, location, and market conditions.
Close on the Loan - Once approved, you’ll close on the construction loan and begin receiving funds in stages as different phases of construction are completed.
Begin Construction and Draw Inspections - Lenders release loan funds in increments based on project milestones. They may require periodic inspections to ensure the work aligns with the approved plans.
Convert to a Permanent Mortgage - Once construction is complete, your loan will either convert into a permanent mortgage or you’ll need to refinance into a traditional home loan.
Benefits of a New Construction Loan
Allows you to build a customized home that fits your needs.
Provides funds in stages to keep construction on track.
Can be converted into a long-term mortgage for convenience.
Helps cover construction costs without needing large upfront cash reserves.
Santa Clarita Construction Loan FAQ
Building a home from scratch can be a rewarding experience, but it requires careful planning and the right financing. The team at Peregrine Financial can help you decide which loan is best for you, and can help you get the loan you need for a new build.
Reach out to us today to start the process.
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