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3 Things to Consider in a Custom Construction Loan

If you're house hunting, you'll find something you don't love in a few houses. For some shoppers, it could be small—the island in the kitchen needs to be a little to the left—for others, it may be a bit more significant—like missing an extra bathroom.

Project manager shaking hands with architects in construction site

If you're flexible with location, and you have some extra time, building a custom home may be the only way you end up with a place that meets ALL of your qualifications.

Unfortunately, building a custom home is often far more complicated than buying a house that's move-in ready (check out our article on what to look for when shopping for a lot to learn more). There's more room for error with things like government permits, building certifications and weather-related challenges. There are also a lot more people involved like architects, electricians and inspectors. Naturally, this means that receiving financing for your custom build could be a lot more complicated too. Here are a few things to think about.

  1. Build in time for inspections & approvals.

    When you buy a move-in ready home, you'll likely be approved and receive the funding you need from your lender in one lump sum (less the escrow process, of course).

    How does that work? After completing a lender's pre-approval or pre-qualification steps, you'll be approved for a mortgage up to a certain dollar amount. Then, after a few inspections of the specific house that you want to purchase, your lender will provide the funds to the seller to complete the purchase.

    Carpenter and client pointing and looking at kitchen compared to building plans on tablet

    On the other hand, when financing a custom home money will usually be provided in stages. For example, you may receive a certain percentage of your total loan amount to buy the land, then another set amount to start the foundation, followed by yet another to complete the structure, and so on. However, lenders will almost certainly have inspections and verification steps that need to be completed BEFORE you receive the next set of funding—another reason it's important to be flexible and build in extra time in your process. Many lenders may even require separate loans, with their own unique application requirements, for these various building "mile markers".

  2. You could need more than one loan.

    As mentioned above, many lenders require multiple loans to build one house. For example, one loan will pay for the building of the home, and the other will be your “permanent” financing.

    At WaFd Bank, our custom construction loan is a little more unique, and easier to understand (at least we think so!). Unlike most lenders, we only require ONE loan for both the construction of your home AND its permanent financing. This means underwriting only happens once, you'll have just one monthly payment and one loan to keep track of. All of this helps you keep your project on time and running smoothly.

    Construction workers analyzing blueprints in the apartment and pointing
  3. Who you're working with at first might not be who you'll work with later.

    As is the case with most home loans, your custom construction mortgage could be bought and sold over and over again. Many lenders sell their products (which includes mortgages, among others) to other lenders. So although you may be applying and working with the local bank branch down the street, there's a good chance your loan(s) will be sold to another bank or other lender. If you've got multiple loans for your home - and most custom builds do—you can see how this can get confusing.

    We handle loans a little differently too. As a portfolio lender, we don't sell our loans. So if your mortgage is with WaFd Bank today, then you can rest assured that we will always be there to answer your questions or concerns down the road.

    Couple meeting with financial advisor

We're here to help you build your dream house.

Now that you know a thing or two about what to expect when building, check out our article that explains more about what a Construction-to-Permanent Loan is and a bit about how it works.

If you're thinking about building your dream house and have some questions, or want to find out how to get started, then let's chat! Contact your local loan officer for information about how we can help you. We have more than 105 years of experience to make sure things go smoothly!

Real estate agent and clients looking at paperwork in new home

Check out WaFd Bank's Custom Construction Calculator!

WaFd Bank's all-in-one loan will help you build the dream home that's the right fit for you. If you've done all the research and are ready for help with your construction loan, just stop by your local branch.

Try Construction Calculator

All loans subject to credit approval and program restrictions and requirements