Building a custom home isn’t something you do on a whim. It takes a lot of time and planning to be ready to make that investment in your future. Whether you are building your forever home, still deciding whether to buy or go custom, or simply just shopping around for ideas, one of the first questions you’ll be thinking about is How will we pay for this project?
It’s a common question, and one we receive frequently at The Corbo Group. We understand that financing a custom home requires careful consideration and often months or years of planning.
We’ve put together a guide to help set you up for success when saving for a custom home build. Here’s our advice:
How to Plan and Save for a Custom-Built Home
Everyone’s custom home will be different, which also means everyone’s journey to budgeting and financing their home will be unique, too. Here’s how to ensure you get started on the right path:
Research Your Area
First, learn more about your area. You may know what neighborhoods you love, the best school districts, and your ideal location based on proximity to your favorite local spots. But what you probably don’t know yet is where lots fetch a premium because of demand, which town has extra-strict permitting or zoning requirements, or what you can expect to pay on average per acre.
This is your first step — call a realtor or deep dive online to learn more about buying land and how location influences your custom build.
Set Realistic Goals
Once you have an understanding of your local landscape, you can start to set realistic goals for your build. At this point, you should get in touch with home builders, even if you are just in the planning phase, to find out how much your dream home will cost.
This can help you understand how much to save and how to make your budget go as far as possible. By consulting with multiple local design-build firms, general contractors, or architects, you can understand what’s possible within your target price range.
For example, in Connecticut, $1.5M could cover a smaller lot and a custom home with high-end finishes, or a larger lot in a more desirable area with a slightly simpler build.
Plan Ahead
Once you’ve set a goal, you’ll need to take a look at your finances and come up with a roadmap to get to your custom build goal. Many clients choose to open a dedicated savings account and put money away each month until they reach their goals. Others prefer to use investments to help their money grow faster.
Custom building does require a significant amount of cash — 20-30% of the total project cost is typical for a down payment. However, it’s unlikely that you’ll be paying for your custom home in cash up front.
Our best tip — keeping in mind that we aren’t financial advisors — is to get a quote from your builder and then learn about different financing options to make your dream a reality.
Home Financing Options
Most homeowners, first-time or otherwise, rely on financing to achieve their custom build goals. Depending on your current financial situation and the estimate for your custom home, you may have some flexibility in how you fund and save for your house. Here are some of the most common options:
Construction Loans
Construction loans are the most common type of financing people choose when building custom homes. There are two different methods of using construction loans:
First, there’s an option that allows you to cover both the construction phase and the ongoing mortgage payment in a single loan. This is a benefit because you pay the closing costs once, and finance the entire build and mortgage. This is referred to as a construction-to-permanent loan. However, these loans often require you to pay the interest down during the construction, and start paying principal after completion.
The other option is getting a standalone construction loan and applying for a traditional mortgage to pay off the construction loan. This option means you’ll have a shorter-term loan with a higher interest rate, but you can shop around for lower rates after the home build is completed.
To get these loans, you’ll need detailed plans and blueprints, the ability ot make a down payment, and a strong credit score and low debt-to-income ratio.
Home Equity
Home Equity Lines of Credit, or HELOCs, can be used to finance a custom build, though it’s not as common.
A HELOC borrows against the value of an existing property, so if you own your land and plan to keep your existing home, this can be a good way to leverage your existing equity for access to funds at a lower interest rate. However, if you plan to sell your home before paying off the HELOC, it can make the sales process complicated and reduce your overall profit. HELOCs are generally best for smaller amounts, as the interest rate, while generally lower than other loans, is subject to change.
Home Equity Loans come with similar parameters, but it’s a fixed interest rate, which is often higher than a HELOC. Again, this loan is a good choice if you need to borrow a smaller amount.
Can I Use a Traditional Mortgage for a Custom Build?
You can’t use a traditional mortgage for the entire build process, but a construction-to-permanent loan is very close.
During Construction, the loan acts as a short-term construction loan with staged “draws” and interest-only payments.
After Completion, once the home is built, inspected, and issued a Certificate of Occupancy, the loan automatically converts into a traditional, long-term mortgage. This means you’ll have one loan application, approval process, and closing costs. You’ll pay interest on the loan for a fixed term until you move in, at which point your loan will change into a traditional mortgage.
What Affects Your Home Financing Options?
To be able to finance your custom build, you’ll have to meet certain criteria based on your lender’s requirements. Here’s what they’ll be looking for:
Income and Employment
Lenders require stable, verifiable income to ensure you can manage the interest-only payments during construction and the full mortgage afterward. Generally, lenders like to see a steady employment history for two years.
Credit History and Debt
A strong credit score, typically 700 or above, secures better rates and approval, while a low debt-to-income ratio proves you can comfortably take on the new debt.
Cash on Hand
Generally, custom builds will need significant cash for the 20%-30% down payment on the total project cost, plus reserves to cover unexpected cost overruns and emergencies during the build.
Building Team
Your lender will also vet and approve your general contractor to assess financial stability and track record. Going with an experienced custom builder reduces the risk of project failure for the bank.
Design Plans
Detailed architectural plans and a line-item budget are mandatory, as they determine the final loan amount and provide the lender with a schedule to disburse funds.
Project Value
Finally, the loan amount is based on the home’s appraised value upon completion. If your construction costs exceed this value, you’ll be required to cover the excess in cash.
Learn More About Financing Your Dream Home Build in Connecticut
When it comes time to build your home, working with a trusted partner will be a big factor in how your budget is managed. We offer detailed estimates and prioritize transparent, accurate pricing so you can decide where to splurge and where to save.
In addition, we have real estate partners to help you get the perfect lot in your price range. Beyond that, we will work with you through every phase, from design to final walkthroughs, to manage your budget and help you make the most of your custom build.
Learn more about custom home financing options on our site.
