Financing & Construction Loans for Custom Homes in San Diego, CA

Buildable has a shortlist of preferred partners that we work with who offer different loan products, including construction loans. One of our key differentiators is that we help our clients strategize the right approach for your needs. We can explain how they work and provide you an overview of the benefits of each approach and make the introductions so you can move forward confidently.

There are several types of loans that can be used to finance custom home builds. Here are some common ones:

• Construction loans: 99% of people building a custom home will get a construction loan, which are specifically designed for financing the construction of a new home. Construction loans can be structured in different ways, such as a one-time close loan or a construction-to-permanent loan. This means that the loan can morph into a traditional 30 or 15 year fixed at the end of construction. Typically the owner would need to bring in 20% into the project, however, the land does count toward the 20% downpayment.

• Lot Loans: This is a loan to cover the costs of buying the land for construction. Most lot loans can be secured with as little as 25% down. This is meant as a short-term loan, and will be paid off or absorbed by the construction loan.

• Home equity loans or lines of credit: If you already own a home and have built up equity in it, you may be able to use a home equity loan or line of credit to finance your custom home build. These loans allow you to borrow against the equity in your home, and can be a good option if you have a significant amount of equity built up.

• Hard Money Loan: A hard money loan is a short-term loan typically used for real estate investments that is issued by private investors or companies and secured by collateral, usually the property being purchased or renovated. They are easier to obtain than traditional loans but come with higher interest rates and fees, and shorter repayment terms. Hard money loans can be a useful option for real estate investors who need to secure financing quickly or who may not be able to qualify for traditional loans, but borrowers should carefully consider the costs and risks before applying.

Construction loans are short-term, interim loans used for new home construction. The contractor receives disbursements of the loan as work progresses based on the percent completion of the build. They are processed similarly to a traditional mortgage but require more documentation from the builder. The good thing is that we’re very familiar with this process and will ensure the experience goes smoothly from our side.

Financing a home build is very similar to purchasing an existing home. Down payments typically start at 20% of the entire project budget or less depending on the financing approach you take. We can introduce you to our shortlist of preferred partners to discuss what’s best for you.

A number of our preferred financing partners offer interest-only loans during the first year of construction. This means you don’t’ have to pay the full cost of the loan during construction, only the interest payments on what you borrow. So if you have a $1M loan and in the first month we spend 10% or $100,000 of the build costs, you only pay interest on a $100,000. The monthly payment will be higher as the project progressively gets completed.

After the “interest-only” time period of the construction loan is completed and you move in, there can be options for the loan to transform into a conventional 15-year or 30-year fixed-rate mortgage. Some clients choose to re-finance the loan to shop around for potentially better rates take advantage of historically low rates. You can discuss this directly with our preferred partners.

The process for getting a Construction Loan is very simple and straightforward. If you’ve applied for a mortgage before, it will be almost indistinguishable. If you can qualify for a mortgage, most likely, you’ll qualify for a construction loan. The first step is meeting for pre-approval for your construction loan once you begin your land search. This will enable you to understand if your financial situation makes you a good candidate for a construction loan. Once you purchase land, design your home, and submit for permits, we will collectively circle back with the lender to submit all the paperwork needed to apply for and fund the loan. This will take about 60 days. Buildable is approved by most lenders and can easily get approval from lenders we have yet to work with.

The process for getting a Construction Loan is very simple and straightforward. If you’ve applied for a mortgage before, it will be almost indistinguishable. If you can qualify for a mortgage, most likely, you’ll qualify for a construction loan. The first step is meeting for pre-approval for your construction loan once you begin your land search. This will enable you to understand if your financial situation makes you a good candidate for a construction loan. Once you purchase land, design your home, and submit for permits, we will collectively circle back with the lender to submit all the paperwork needed to apply for and fund the loan. This will take about 60 days. Buildable is approved by most lenders and can easily get approval from lenders we have yet to work with.

There are government-backed loan programs that can be used to finance custom home building. Here are some of the most common ones:

• VA construction loan: This loan program is available to eligible veterans, active-duty service members, and surviving spouses, and can be used to build a new home or renovate an existing one. The VA construction loan offers several benefits, including no down payment requirement and no mortgage insurance.

• USDA rural development loan: This loan program is offered by the U.S. Department of Agriculture (USDA) and is designed to help low- to moderate-income borrowers in rural areas purchase, build, or renovate a home. The program offers several different types of loans, including construction loans. However, the maximum loan is not enough to cover construction in San Diego.

The following are some examples of other construction loans and programs:

• Native American Direct Loan Program: The Department of Veterans Affairs (VA) also offers a Native American Direct Loan (NADL) program to help eligible Native American veterans finance the purchase, construction, or improvement of homes on federal trust land.

• Multifamily construction loans: These are loans designed specifically for the construction of multifamily properties such as apartment buildings, townhouses, and condos. They are typically offered by banks and other financial institutions and can be used to finance the entire construction process, including land acquisition, design, and building.

• Physician construction loans: Some lenders offer physician construction loans that are specifically designed for medical professionals. These loans may offer special benefits such as lower interest rates, reduced down payment requirements, and more flexible underwriting criteria.

• Jumbo construction loans: Jumbo construction loans are designed for borrowers who need to finance the construction of a high-end, luxury home or a home that exceeds the conforming loan limits set by Fannie Mae and Freddie Mac. These loans typically have higher interest rates and stricter underwriting requirements than traditional construction loans.

The following is how construction loans will typically work for a custom home build:

• Application: The borrower applies for a construction loan with a lender, typically a bank or other financial institution. The lender will review the borrower's credit history, income, and other financial information to determine if they qualify for the loan.

• Approval: If the borrower is approved, the lender will typically provide a loan commitment that outlines the terms and conditions of the loan, including the loan amount, interest rate, repayment terms, and any fees associated with the loan.

• Disbursement: Once the borrower has obtained any necessary permits and approvals, the lender will begin to disburse the loan funds in a series of "draws" or payments that are tied to specific construction milestones. The borrower will typically need to provide documentation showing that the work has been completed before the lender will release the next draw.

• Completion of Construction: Most lenders offer "construction-to-permanent" loans that allow the borrower to convert the construction loan into a mortgage once the construction is complete. Some owners will refinance their homes to receive better terms on a 30-year construction loan. Once construction is complete, you will start monthly mortgage payments, like a traditional home.

Construction loans can be a good option for financing a custom home build, but they also come with their own set of pros and cons. Here are a few to consider:

Pros:

• Interest-only payments: During the construction phase, borrowers may only be required to make interest payments on the loan, which can help keep monthly payments low.

• Flexible draw schedule: Construction loans typically provide funds in a series of draws that are tied to specific construction milestones, which can help ensure that the project stays on track and that funds are not disbursed until the work is completed.

• Customizable terms: Construction loans can be customized to meet the needs of the borrower, including loan amount, repayment terms, and interest rates.

Cons:

• Higher down payment requirements: Construction loans often require a larger down payment than traditional mortgages, which can be a barrier for some borrowers.

• More complex process: Construction loans involve more paperwork and require more coordination between the borrower, builder, and lender than traditional mortgages. At Buildable, we cover this for our clients, so they don’t need to worry.

Overall, construction loans are a great option for financing a custom home build, the interest-only payment period makes the product unique and perfect for most people building a custom home.

To qualify for a construction loan for a custom home build, you will generally need to meet the following requirements:

• Good credit: Lenders will typically look for a credit score of at least 680 or higher, although some lenders may have different requirements.

• Down payment: You will typically need to make a down payment of at least 20% of the total cost of the total project costs, although some lenders may require a higher down payment.

• Income verification: You will need to provide documentation to verify your income, including tax returns, pay stubs, and bank statements.

• Detailed plans and budget: You will need to provide detailed plans and a budget for the construction project, including information about the builder, the timeline for construction, and the cost of materials and labor.

• Appraisal and inspection: Lenders will typically require an appraisal and inspection of the designs to ensure the planned home it is worth the amount of the loan.