Construction loan basics: build vs buy existing
Building a home sounds like the dream. The financing is more complex than most buyers expect.
Scenario
Andre owns a lot and wants to build a custom home. He has $60,000 saved and a stable income of $110,000/year. He assumed he could get a regular mortgage to build. What he finds out is that construction financing works differently — it's a short-term loan that funds the build in draws, then converts to a permanent mortgage at completion. The process is longer, more complex, and requires more cash reserves than buying an existing home.
How construction loans work
- Short-term loan (typically 12 months) funds the build
- Funds released in draws as construction milestones are met
- Interest-only payments during construction phase
- Converts to permanent mortgage at completion (construction-to-perm)
- Or: get a separate construction loan then refinance into a mortgage
What makes it harder than a regular mortgage
- Requires detailed plans, permits, and builder contracts upfront
- Higher down payment — typically 20–25%
- Builder must be approved by lender
- Appraisal based on plans and comps — not an existing structure
- Cost overruns are your responsibility, not the lender's
Things to consider
- Do you have the cash reserves to cover construction delays and cost overruns — they are almost universal?
- Where will you live during the build — and have you budgeted for that cost?
- Is your builder licensed, insured, and experienced with lender draw processes?
- Have you gotten a fixed-price contract from your builder — not a cost-plus arrangement?
- What is the timeline realistically — and what does a 3-month delay cost you in carrying expenses?
BRIK takeaway
Building a custom home is achievable — but it requires more capital, more patience, and more planning than buying existing. Go in with accurate cost estimates, a vetted builder, and reserves for the unexpected. The dream home becomes a nightmare when undercapitalized buyers run out of money mid-build.