NEW CONSTRUCTION FINANCING
Financing for Building a Home From the Ground Up
Building a home is different from buying one that is already complete — and the financing is different too.
A new construction loan is designed to help finance the cost of building a home, with funds typically released in stages as construction progresses rather than all at once at closing.
Depending on the loan program and your project, construction financing may allow you to build on land you already own, purchase land as part of the transaction, finance eligible construction costs, and ultimately transition into permanent mortgage financing once the home is complete.
Platinum Lending Solutions helps borrowers throughout Oregon and Washington evaluate construction loan options and understand how the financing fits together before construction begins.
What Is a New Construction Loan?
A new construction loan provides financing for a home that has not yet been completed.
Because the lender is financing a property while it is being built, approval involves more than reviewing the borrower’s income, assets, credit, and other traditional mortgage qualifications.
The lender may also evaluate the:
Land or Building Site
Builder or General Contractor
Plans and Specifications
Construction Contract
Project Budget
Construction Timeline
Expected Completed Value of the Property
Draw Schedule
These additional requirements make planning particularly important when financing new construction.
What Can a Construction Loan Finance?
Depending on the loan program and transaction, construction financing may potentially be used to:
• Build a home on land you already own
• Purchase land and build a home
• Construct a custom primary residence
• Finance eligible labor and material costs
• Pay certain eligible construction-related expenses
• Transition into permanent mortgage financing after construction
The exact costs that can be included vary by lender and loan program.
Land & Construction Financing
Building on Land You Already Own
If you already own the land where you plan to build, the land may become an important part of the financing structure.
Depending on the loan program, the value of the land and the amount of equity you have in it may potentially be considered when determining your required investment in the project.
Any existing liens against the land will also need to be evaluated.
Because programs treat land equity differently, it is helpful to review the financing before assuming how much additional cash you will need for construction.
Buying Land and Building a Home
You do not necessarily have to own your building site before obtaining construction financing.
Certain programs may allow qualified borrowers to finance the acquisition of land along with the construction of the home.
This can create a more coordinated financing strategy, but the property, proposed construction, borrower qualifications, and overall project must meet the requirements of the selected loan program.
If you are considering purchasing land specifically to build, exploring financing before completing the land purchase can help you understand what may be required.
How Construction Loan Funds Are Distributed
Unlike a traditional mortgage used to purchase a completed home, construction loan proceeds are generally not distributed in one lump sum.
Instead, construction funds are commonly released through a series of draws as designated stages of construction are completed.
A typical draw process may involve:
01
The builder completing an established stage of construction.
02
A draw request being submitted.
03
The completed work being reviewed or inspected as required.
04
Approved funds being released for eligible construction costs.
05
Construction continuing to the next stage.
The exact draw procedure varies by lender and loan program.
Understanding the draw process before construction begins can help both the borrower and builder know how funds will be released throughout the project.
Builder and Contractor Requirements
The builder is an important part of a construction loan.
Many construction lenders have specific requirements that a builder or general contractor must meet before the project can be approved.
Depending on the program, the lender may review information regarding the builder’s experience, licensing, insurance, financial qualifications, project history, contracts, and other documentation.
Builder approval should be addressed early in the financing process. A borrower may otherwise qualify for financing while the proposed builder or project does not meet the selected lender’s requirements.
Plans, Specifications, and Construction Budget
Before a construction loan can be finalized, the lender will generally need a clear understanding of what is being built and what it is expected to cost.
Documentation may include:
• Building plans
• Project specifications
• Construction contract
• Detailed cost breakdown
• Labor and material estimates
• Construction timeline
• Applicable contingencies
These items help the lender evaluate both the proposed project and the amount of financing required to complete it.
How Is a New Construction Home Appraised?
Construction financing requires the lender to evaluate a home that does not yet exist in its completed form.
The appraisal may therefore consider the property’s expected value once construction is finished, based on the plans, specifications, property characteristics, location, and requirements of the applicable loan program.
The completed value can be an important component of determining the final financing structure.
Construction Loan Down Payments and Equity
There is no single down payment requirement that applies to every new construction loan.
The amount you may need to contribute can depend on factors including:
• Loan program
• Borrower qualifications
• Total project cost
• Completed appraised value
• Land value and existing land equity
• Property type
• Loan amount
• Available assets and reserves
If you already own the land, available equity may affect how the transaction is structured.
This is one reason it is useful to evaluate financing early rather than assuming construction financing will work like the down payment on a traditional home purchase.
Construction-to-Permanent vs. Construction-Only Financing
One of the important decisions when financing a new build is what happens after construction is finished.
Some construction loans provide financing only during the construction period. Once the home is complete, separate permanent mortgage financing may be required.
A construction-to-permanent loan combines the construction financing and permanent mortgage into a single loan structure, potentially allowing the borrower to complete the financing with one closing.
The appropriate structure depends on the project, borrower, available programs, and longer-term mortgage strategy.
When Should You Start the Financing Process?
Ideally, financing should be explored before you finalize every aspect of the project.
Starting Early Can Help You Understand:
• How much you may qualify to finance
• How land equity may be treated
• Potential cash or equity requirements
• Builder requirements
• Reserve requirements
• Documentation the lender will require
• How construction draws will work
• What happens when construction is complete
It may also help identify financing limitations before you purchase land, sign a construction contract, or commit substantial funds to architectural plans, engineering, design, or other project expenses.
New Construction Financing in Oregon & Washington
Construction projects can vary considerably depending on where and what you are building.
Property characteristics, land, project costs, permitting, builder requirements, construction timelines, and the financing programs available can all affect the transaction.
As an independent mortgage brokerage serving Oregon and Washington, Platinum Lending Solutions can evaluate construction financing through multiple lending sources rather than limiting you to the programs offered by a single lender.
Our goal is to help you understand the available financing structures and determine which options may align with your property, construction plans, financial qualifications, and longer-term mortgage strategy.
Planning to Build a Home?
Construction financing should be part of the conversation before the project is fully committed.
Platinum Lending Solutions can help you evaluate new construction loan options, understand potential land and equity requirements, and identify the financing considerations that may affect your project before you move forward.
Have Questions About Your New Construction Loan Options?
Tell us a little about the property, land, builder, and home you are planning to build. We can help you determine which financing options may be appropriate and what steps to consider next.
New Construction Loan FAQs
Do I have to own land before getting a construction loan?
Not necessarily. Depending on the loan program, you may be able to build on land you already own or purchase the land as part of the construction transaction.
Can land I already own count toward my investment?
Potentially. Existing land value and equity may be considered when structuring certain construction loans. How the equity is treated depends on the specific program and transaction.
Can I finance both the land and construction?
Certain construction loan programs may allow qualified borrowers to finance the land acquisition and construction within the same transaction.
How do I receive the construction funds?
Construction funds are generally released in stages through a draw process as designated portions of the work are completed and applicable lender requirements are satisfied.
Does my builder have to be approved?
Many construction loan programs have specific builder or general contractor requirements. Builder approval should be addressed early in the process.
Can I be my own general contractor?
Some programs require an approved professional builder or general contractor and may restrict owner-builder arrangements. This should be determined before selecting a construction loan program.
How is the home appraised if it hasn’t been built yet?
The appraisal may evaluate the property’s expected completed value based on the plans, specifications, property, proposed improvements, and requirements of the applicable loan program.
What happens to my construction loan when the house is finished?
That depends on the financing structure. A construction-only loan may require permanent mortgage financing after completion, while a construction-to-permanent loan combines the construction and permanent financing within one loan structure.
