Light gray custom home with detached garage - custom home by Sineath

A Construction Loan Primer

For the most part, people finance the construction of their custom-built home. Construction loans are different from a traditional or conventional loan people get on an existing home. And, while both types of loans request a lot of information, a construction loan requires a lot of details about the home in advance.

Asheville area lender Kelly Davis, vice president of mortgage lending at Park National Bank, took some time out of her day to answer some common questions we get about how to finance a new construction home. She’s worked with several clients, and she’s very familiar with our process.

Kelly Davis, vice president of mortgage lending at Park National Bank headshot

Kelly Davis, vice president of mortgage lending, Park National Bank

What is a construction loan, and how are they different from a conventional loan?

A construction loan is a loan a borrower gets to have the home built as opposed to a conventional loan, which is a loan on an existing structure.

How do construction loans work? Please describe the process?

Not to get into too much detail, but after the borrower applies for the construction loan, we obtain the cost estimates to build the home, a full set of plans, and the builder contract to review. We will lend up to 80% of the total appraised value (including the lot).

During the construction process, we work closely with the builder. When they have a draw request, meaning they request funds to pay vendors and for materials, we have an inspection done to confirm the percentage of completion. We have several loan options for a one-time construction to permanent financing loans.

What if things take longer and materials are on backorder? Does that affect the construction loan?

We have certainly seen more of this lately due to building costs and wait times on materials, appliances, cabinets, etc. Our typical construction loans are 12-18 months; however, we can extend up to 12 additional months with good reason.

What happens to the loan at the end of construction?

We can modify the construction loan into a permanent loan. If rates happen to be lower, we can do another conventional loan at the lower rate; however, this would be a second loan closing.

What else does someone financing their custom-built home need to know about construction loans?

I do a lot of custom home construction lending as this is just our market here. I think the most important thing the bank looks at is if the borrower has sufficient assets to cover any overages or unexpected costs.

Do you have more questions about financing your custom home? Kelly is happy to answer your questions. Email her at [email protected] or call her at 828-348-2280.


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