Financing Your Dream Home with a Construction Loan

Finding a house that feels like home is never easy. If open houses are coming up short, or perhaps, if you’ve found the perfect plot of land, you may be considering building your next property. Whether your dream home features built-in storage for maximum organization, a chef’s kitchen to make your grandmother’s famous lasagna recipe, or the perfect staircase for family pictures, a construction loan can help make that dream a reality.

Construction loans can be complicated, so let’s break down this option and what the home-building process could look like for you.

Construction loan basics

A construction loan might be a great fit for you if you’re not buying in a new subdivision, where the builder likely has a construction line of credit. Outside of subdivision development, builders are less likely to have their own financing options, so a construction loan through Virginia Credit Union can give you the freedom to pick the perfect location for you and your family.

Already know where you want to build? You can include the purchase of the land or lot in your construction loan. Or, if you’ve already purchased it, you can use your construction loan to pay off an existing lien on the land or lot.

Types of construction loans

So, you’re thinking building with a construction loan might be the right path. There are two types of loans to choose from, a construction-only loan and a construction-to-permanent loan.

Construction-only loan

A construction-only loan is exactly what it sounds like. Through this loan, you’ll finance the cost of building a home with the option to include the land purchase as well. When your construction is almost finished, your mortgage loan officer will reach out to discuss refinancing your construction loan to a permanent mortgage. (Automatically roll into a permanent mortgage with our construction-to-permanent loan, below.)

Construction-to-permanent loan

Just like a construction-only loan, with a construction-to-permanent loan you can finance the cost of building a home (including the purchase of the lot or land). You’ll close on your construction loan AND permanent mortgage at one time, saving you time, money, and the headache of going through the closing process again.

Qualifying for a construction loan

Because there’s no collateral (yet!), the bar to qualify for a construction loan is higher than your typical mortgage. It must be your primary residence and you’ll need a credit score of at least 740. (Not quite there yet? Learn more about your credit score and how to improve it.)

With Virginia Credit Union, your construction loan must be for at least $50,000 with a loan-to-value of 80 percent. That means you must have 20 percent equity in the property, which can take the form of a down payment or the value of your lot if you already own the land.  Need help saving for a down payment? Read "How to Save for a  Down Payment". You’ll also be able to select a term of six, nine, or 12 months until your dream home is built and ready to occupy!

How much do construction loans cost?

It’s not surprising that this is the most popular question we get from prospective new homeowners. Every situation is different, and we are happy to walk you through what works for your dream and your budget. But one important thing to know first is that throughout the construction process, you’re only paying interest on the money that has been paid to the builder.

For example, if the builder’s draws a total of $100,000 during the third month of construction on a $300,000 loan, you’ll only pay interest on $100,000 that month. As the builders draw more money to complete your home, your monthly payments will increase over the course of the build, resulting in a affordable way to build a home.

Still dreaming of high ceilings and the perfect view? Here’s how to get started with a construction loan.

1. Apply for a construction loan.
   Prepare your mortgage application documents, and then let our expert team walk you through the pre-qualification and application processes for your construction loan.
2. Put your dream on paper. 
   Secure a builder and confirm the plans for that perfect kitchen (we can practically smell Grandma’s lasagna already!). Your plans, specs, and builder will all need to be finalized and reviewed by VACU in order to close on your loan. During this time, we’ll work with you to create a “draw” schedule, which is a timetable for payments from your loan to your builder as construction progresses.
3. Close on your construction loan. 
   Once approved, your construction loan will move to closing. Prepare your best signature for all of the paperwork and your funds for closing costs and any required down payment as well.
   
   Note: If you choose a construction-to-permanent loan, you’ll close on both your construction loan and your permanent mortgage at this step.
4. Break ground on your next adventure.
   After closing, construction can begin. Virginia Credit Union has partnered with a digital platform called Built to help you and your builder easily manage the draws online for each stage of the construction so that the builder can be paid directly from your loan in real time.
5. Say hello to home (and a permanent mortgage).
   If you chose a construction-only loan, once construction is complete, your construction-only loan needs to be refinanced into a standard long-term mortgage or otherwise paid off. However, if you chose a construction-to-permanent loan, once your construction is complete, your permanent mortgage will automatically be in effect.