How to Finance a Custom Home Build in Minnesota
Building your dream home can be an extremely rewarding experience — especially with a reputable, communicative builder. However, financing a custom-built home usually isn’t as gratifying, and often presents its own unique challenges. It can be an intimidating process, especially if you’re not sure where to start.
That’s why the team at Norton Homes is happy to help customers navigate the financing process, setting them up with a trustworthy preferred lender. In addition to this accommodation, we offer this guide to understanding how you finance new home construction in Minnesota.
Understanding Custom Home Financing
A special type of loan is needed in order to finance a custom build. Since traditional mortgage loans only cover existing homes, building a home from the ground up requires something called a construction loan.
Construction loans are meant to cover all the costs of building a home, from permitting to material costs to labor. The plot of land is often included in construction loans as well, but not always. Some people choose to build on land they already own, while others pay cash for their lot and finance the remaining construction costs.
Types of Construction Loans in Minnesota
Getting financing for a construction loan in Minnesota requires a certain amount of financial clout. Due to greater uncertainties, construction loans often require a 20% down payment or more, and a credit score nearing 700 — although terms will vary somewhat by lender.
There are multiple types of construction loans available, each with distinct advantages. Here’s how different construction loans work in Minnesota:
One-Time Close Construction Loan
One-time close construction loans in Minnesota, otherwise known as construction-to-permanent or single-close construction loans, convert into a traditional mortgage loan after the construction process is completed. This type of loan ensures there is only one closing process and only one set of closing fees. This can save both time and money, but requires a very detailed plan upfront.
Since the terms are locked in long before construction, one-time close construction loans offer no flexibility — no matter if interest rates drop during the building process, or you’re interested in changing your loan terms.
Two-Time Close Construction Loan
For greater flexibility, it’s possible to get a two-time close construction loan, otherwise known as a standalone construction loan. These loans work in two separate stages: first, you first get a loan for the construction phase, then, once the home is built, you apply for a traditional mortgage.
Two-time close construction loans allow you to shop around for the best mortgage rates and terms after construction, but they do involve two separate closing costs. This is an extra investment of both time and money, but it could potentially save you money in the long run.
Preparing for the Financing Process
Understanding the different types of construction loans is important, but so is learning about the financing process itself. This should involve finding a lender, analyzing your budget and needs, planning for contingencies and preparing the necessary documentation.
Finding a Lender
Find a lender with experience in construction loans in Minnesota. Your choice of lender can make a big difference in your financing experience, as it’s their responsibility to guide you through the process — from pre-approval to the final mortgage.
Compare the terms from multiple lenders to find the best fit for your project. Although lenders typically offer similar terms, some may include more favorable rates, additional fees or other significant things to watch out for.
Analyze Your Budget and Needs
As with any big financial decision, it’s crucial to analyze your budget. This includes deciding what you can truly afford, taking into account all current and projected future expenses for you and your family. Planning this step is especially important, especially since construction loans require higher down payments and interest rates than traditional mortgages.
Balance any budgetary restrictions with your custom home plans, figuring out what needs to be prioritized or deprioritized.
Planning for Contingencies
Even when working with the most reputable builders, unexpected costs happen. This makes it necessary to set aside a budget for contingencies. If everything goes according to plan, you’ll be able to repurpose this money later — maybe even for something exciting. If there are a few hiccups, however, you’ll be able to navigate through them without having to rethink your budget.
Necessary Documentation
To get your construction loan approved, you’ll need to provide certain forms of documentation. These include, but aren’t necessarily limited to:
- Final construction plans and specifications
- Sworn construction statement
- Scope of work
- Purchase agreement for your lot (if purchasing land)
- Credentials from your builder (including builder’s license and proof of Licensed General Contractor)
Your lender will work with you to provide a complete, detailed list of all the necessary documentation.
How Norton Homes Facilitates the Financing Process
To make custom home financing an easy and painless process for its customers, Norton Homes can help to arrange financing. With over two decades of experience building custom homes, Norton has formed an outstanding network of loan officers who are well-seasoned in the construction lending business. The team will set you up with one of their preferred lenders, ensuring that the financing process goes as smoothly as possible.
Financing Your Dream Custom Home in Minnesota with Norton Homes
Arranging financing is only one small part of the home building process at Norton Homes. From the initial consultation through creating blueprints, completing the construction phase and delivering your finished home, the Norton team will always provide the support and communication you need.
Whether or not you choose Norton Homes as your trusted builder, be completely comfortable with both your builder and your lender. This means understanding the differences between one-time and two-time construction loans, the sort of documentation you’ll need to prepare, and the financial and credit requirements to take out a construction loan — which are greater than that of traditional mortgage loans.
If you’re getting ready to build your dream home, check out Norton Homes’ portfolio of sold homes for a little inspiration or schedule a consultation to learn more about the custom home building and financing process.