On Your Lot Construction Financing

June 10, 2024
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Understanding On Your Lot Construction Financing in 2024

Building your dream home on your own land is an exciting prospect, one that promises to turn your vision of the perfect living space into reality. However, amidst the excitement of envisioning your dream home, the intricacies of construction financing can often appear daunting. Many aspiring homeowners find themselves grappling with uncertainties and misconceptions surrounding the affordability and accessibility of custom home construction. It’s a common misconception that custom homes are exclusively for the wealthy, leaving many feeling disheartened or uncertain about pursuing their dream.


But fear not, for we’re here to shed light on this topic and demystify the process of construction financing for on-your-lot custom homes in 2024. Through interviews and expert insights, we’ll explore the nuances of construction financing, providing you with the knowledge and understanding needed to embark on your custom home building journey with confidence. Whether you’re a first-time homeowner or a seasoned builder, join us as we navigate the landscape of construction financing and pave the way for your dream home to become a reality.

Experts in Custom Home Construction and Financing

Corporate headshot of man standing with a backdropWith experience building custom homes across Washington, Oregon, Idaho, and Arizona that dates back to 2010, our team brings a wealth of knowledge and insight to the table when it comes to all aspects of building a custom home, including construction financing. Whether you’re exploring different loan options, navigating the approval process, or seeking insights into market trends, our team is here to offer personalized guidance tailored to your specific needs and goals. With Lexar Homes by your side, you can trust that you’re receiving not only expert advice but also a seamless and enjoyable experience from start to finish.


“As a Project Consultant at Lexar Homes, my priority is to guide clients through every step of the construction financing process with clarity and confidence. With a decade of experience and a passion for excellence, I am dedicated to making homeowners’ dreams a reality. Trust and integrity are at the forefront of my approach, ensuring that each project is tailored to meet the unique needs and aspirations of our valued clients.”

Understanding the Difference: Construction Loans vs. Traditional Mortgages

When buying an existing new construction home, homeowners typically get a traditional mortgage, which covers the entire cost of the home and the land in one lump sum. However, when building a custom on-your-lot home, homeowners must secure a construction loan, which covers the cost of the home and also includes funding for the land and its development.


Some key differences between construction loans and mortgages:


  • The distribution of funds for a construction loan is different from mortgages and personal loans. Instead of receiving a lump sum, the lender disburses the money in stages as the construction progresses. These disbursements occur at key milestones, such as when the foundation is laid or when the house is framed.
  • Repayments for construction loans are also different. While with a mortgage, you would start repaying the principal and interest immediately, with a construction loan, the lender typically only expects interest payments during the construction stage. Additionally, borrowers are usually only required to repay interest on the funds that have been drawn until the construction is finished.
  • During the construction process, the lender will have an appraiser or inspector check the house at various stages. As each stage is approved, the lender will release additional payments to the contractor, known as draws. Expect to have between four and six inspections to monitor the progress.
  • For a traditional mortgage, you will need the purchase price and information on the completed home, but to qualify for a construction loan, lenders will want to review a construction plan in addition to the price and features of the home when it is complete.


Photo of couple looking at a set of blueprints with a house under construction behind them

Exploring Your Construction Loan Options

When it comes to financing the construction of your dream home, there’s no shortage of options to choose from. Each type of construction loan offers its own set of benefits and considerations, catering to the diverse needs and preferences of homeowners. Let’s take a closer look at the various types of construction loans available:


Construction-Only Loan:

A construction-only loan, as the name suggests, solely finances the construction phase of your home. Once construction is complete, the total loan balance becomes due. Homeowners can then choose to pay off the loan in full or transition to another loan, such as a traditional mortgage, to cover the balance. It’s important to note that opting for a new mortgage to pay off your construction loan may incur closing costs twice.


Construction-to-Permanent Loan:

Construction-to-permanent loans offer a seamless transition from the construction phase to a traditional mortgage. Initially, the loan finances the cost of building your home, with borrowers making interest-only payments during construction. Once construction is complete, the loan automatically converts into a permanent mortgage, allowing homeowners to pay off the balance over an extended period. This type of loan typically offers flexibility in terms of repayment options, with most buyers opting for a 30-year fixed-rate mortgage.


One-Time Close Construction Loan:

For homeowners seeking simplicity and convenience, a one-time close construction loan may be the ideal choice. This loan combines both the construction financing and permanent mortgage into a single package, streamlining the process and reducing the need for multiple closings. With a one-time close construction loan, borrowers qualify for both loans at the onset of the project, eliminating the hassle of securing separate financing for construction and permanent mortgage phases.


Government-Backed Construction Loans:

For eligible homeowners, government-backed loan programs offer additional options for financing home construction. The USDA construction loan, backed by the Agriculture Department, provides financing for homes built in eligible rural areas. Similarly, VA construction loans cater to veterans, military members, and their families, offering favorable terms and conditions. Additionally, FHA loans, including construction-to-permanent loans and FHA 203(k) loans, provide flexible financing solutions for both new construction and renovation projects.


With a diverse range of construction loan options available, homeowners can find the perfect fit for their unique needs and circumstances. Whether you prioritize simplicity, flexibility, or favorable terms, there’s a construction loan to help you turn your dream home into a reality.

Pro Tip: Simplify Your Financing Journey

Andrew DeMulling of Lexar Homes of Centralia advises opting for a one-step construction loan to simplify the financing process, especially if you own the land. This approach combines construction financing and permanent mortgage into a single package, reducing administrative burdens. Rolling the land loan into a construction loan can further streamline the process and exploring government-backed loans can offer favorable terms. These tips can help homeowners navigate the financing journey with ease for their dream home.

Selecting the Right Lender: A Crucial Step in Your Construction Journey


Selecting the right lender is a crucial step that can significantly impact the success of your project. With numerous options available in the market, finding the perfect lender can seem daunting. Choosing the right lender involves more than just comparing interest rates. It’s essential to consider factors such as the lender’s experience in construction financing, responsiveness and communication style, and willingness to tailor financing solutions to accommodate your project’s unique needs.


One invaluable piece of advice comes from Andrew DeMulling, a seasoned Project Consultant at Lexar Homes Centralia. He emphasizes the importance of working with a lender on the approved lender list for the builder you are working with. Andrew explains, “The reason for that is it is easier to expedite the process by working within established relationships. Every builder has different nuances, and lenders become very involved in that process.” Therefore, it’s crucial to align yourself with a lender who is familiar with the intricacies of your builder’s processes and requirements.


Andrew’s advice is simple yet profound: “My advice is to check with your builder and pick a lender from their list. Don’t make the choice on interest rate alone.” By heeding this advice, homeowners can ensure a smoother and more streamlined financing process, benefiting from the synergy between their builder and lender.

Navigating Current Market Interest Rate Concerns

In a market where interest rates aren’t where you would like them to be, choosing a float-down feature can provide extra peace of mind. A float-down option allows you to lock in your mortgage rate while still having the flexibility to benefit from lower rates if they become available before you close on the loan.


Here’s how it works: if mortgage rates go down during the closing process, you can choose to “float down” to a lower rate, which will reduce your monthly payments and overall borrowing costs. Think of a float-down option as an insurance policy against unfavorable interest rate changes, giving you the chance to improve your financing terms and potentially save money in the long run.


While mortgage rate float-down options offer several advantages, it’s essential to weigh the pros and cons before making a decision:



  • Taking advantage of lower rates can help secure better financing terms and reduce borrowing costs.
  • The fee for a float-down option may be offset by the interest savings over the loan’s life.
  • Some lenders, offer complimentary one-time float-down options, adding value for borrowers.


  • Float-down options come with added fees, making them more expensive than traditional mortgage rate locks.
  • It’s not guaranteed that rates will decrease during your rate lock period.
  • Borrowers may incur additional fees even if they choose not to float down their rate.
  • Not all lenders offer mortgage rate float-downs, so be sure to inquire about this feature when exploring financing options for your construction project.

Establishing Your New Home Budget: Getting Prequalified


Once you have decided on your loan type and lender, gaining clarity on your available budget is the essential next step. You might be asking yourself, “Can I afford this?” Getting prequalified is a vital first step in answering this question. It’s a relatively quick process that provides insight into what you can afford, setting you on the right path for planning your dream home within your financial means.


It’s important to note the distinction between prequalification and pre-approval. While prequalification offers a preliminary assessment of your financial standing, pre-approval involves a more comprehensive evaluation. For project approval, you’ll need to provide a signed builder contract, a set of plans, and all site development bids. This thorough process ensures that you’re well-prepared to move forward with your construction loan.

Your Partner in Construction Financing: Expert Guidance Every Step of the Way

The good news is that you’re not in this alone. With Lexar Homes, you have a team of experts dedicated to guiding you through every step of the process. Whether you prefer to chat online or schedule an appointment, we’re here to offer the support and clarity you need to confidently navigate construction financing. Don’t let misconceptions or complexities deter you from realizing your dream home. With Lexar Homes at your side, your custom home aspirations are well within reach. Let’s take that first step together toward building the home you’ve always envisioned.