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Illustration of blueprints with a dollar sign.
Illustration of blueprints with a dollar sign.
Illustration of blueprints with a dollar sign.

Published Feb. 22, 2018.

How to finance and build your dream home.

If you've got a vision for a dream house — or if land is more plentiful to acquire than existing housing — then building your own home may be a great choice for you.

Some aspects of building are similar to buying an existing home; some are far different. So, consider what it takes to finance and build your home before you put money down on raw land.

First, you're responsible for installing the basic infrastructure necessary to live at the site. Where do you get drinkable water for the property? How do you dispose of sewage and run off? Can you connect to the electrical grid?

These are questions your bank or credit union will need to know before approving a loan for the raw land and home construction. Take time to confirm that basic utilities are available to your property, then work up a solid plan to show your lender how you plan to install them.

"There's prep work required by lenders before you can break ground," says Darren McNannay, director of STCU real estate, one of the largest home loan lenders in Spokane County.

Get a lot from your loan.

Second, once you've identified a patch of land that can support basic utilities, then you can begin the work of getting a property loan, sometimes known as a "lot loan."

"A lot loan helps you buy the dirt to build on," McNannay says. "You may not be ready to build immediately, but you can secure your land now, while it's affordable, in anticipation of future construction of a primary or second home."

A 20-year loan is often used to finance a future home site, though your lender will expect you to build much sooner. This loan can keep your monthly payments low as you near time for construction.

To ensure that you're making progress on your plans, your lender may assign a "balloon" or "call date" to your loan to repay the loan in full. This deadline is an incentive to either begin construction, as promised, or to sell the land to someone else who is up for the challenge.

"We're basing our loan on that end product, on that house being built," McNannay says.

Build on experience.

Third, you'll need to finance construction. A construction loan can pay off your original lot loan, if needed, and provide the money to build and complete your home project.

Before issuing a construction loan, your lender will want verification that you have a reliable, capable builder. Building a new home from the ground up, particularly if it's a custom design, is not for the inexperienced. Your well-intentioned brother-in-law who claims to be handy with a saw will be over his head with this project. You'll need a professional with an experienced track record.

"We're basing our loan on that end product, on that house being built," McNannay says. "It's critical that the builder is viable. We vet the builder to validate that he or she has the necessary experience, licensing, and insurance.

"Most other construction loan requirements — personal financial records, money for a down payment, and a willingness to work with your lender — are the same as taking out a mortgage for an existing house. Continue to work closely with your builder and lender to avoid surprises, McNannay recommends.

With careful planning — and the support of your lender and builder — your dream home will become reality.

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