New Home Financing

Construction Loan vs. Traditional Mortgage: What’s the Difference?

Building a new home is an exciting process, but financing a home you haven’t built yet works a little differently than buying an existing home. The two most common financing options are a construction loan and a traditional mortgage.

What Is a Traditional Mortgage?

A traditional mortgage is typically used to purchase an existing home. You borrow the money needed to buy the home, and the loan is generally set up for long-term repayment, often over 15 or 30 years.

Since the home is already built, the lender can evaluate the property and its value before the loan closes.

What Is a Construction Loan?

A construction loan is designed specifically for building a new home. Instead of receiving all of the funds at once, the lender typically releases money in stages, or draws, as different portions of the home are completed.

For example, funds may be released as the foundation, framing, mechanical systems, and finishing work are completed. This allows the lender to monitor the progress of the construction while providing the funds needed to pay for each stage.

Construction loans can vary from lender to lender. Some are construction-to-permanent loans, which transition into a traditional mortgage once construction is complete. Others are separate construction loans that require you to obtain permanent financing after the home is finished.

Which One Do You Need?

If you're purchasing an existing home, a traditional mortgage is typically the type of financing you'll explore. If you're building a home from the ground up, you'll generally need financing specifically designed for construction.

One of the best places to start is with your lender. Before beginning the design and building process, talk with your bank or mortgage lender about your budget, loan options, interest rates, down payment requirements, and how construction draws will work.

At the end of the day, financing a new home doesn't have to be intimidating. With the right lender and a clear understanding of the process, you can feel confident moving from dream home to construction to move-in day. Over the years we have developed some great relationships with banks that will take great care of your financing. If you need a referral, we are happy to help, just let us know!