If you’re planning to build a new custom home, then it is likely that you may need to consider obtaining a construction loan. Unlike the purchase of a pre-existing structure, those who start from scratch will need to finance the home building process with two types of loans.

How Much Down Payment Do You Need for a New Home Construction LoanThe first of these is a construction loan, which will allow you to pay for the actual design and building of the home. Then, once the structure is in place, a home mortgage can then be secured – typically for a period of 15 or 30 years.

So, on this first part of the custom home building process, how much is “enough” in terms of what you need for a down payment?

There are actually several factors that can come into play here. First, unlike a long-term mortgage, a construction loan will only be underwritten to last for the amount of time that it takes to build your house. In most instances, this averages out to be about 12 months.

Construction loans work much like a line of credit, where you submit requests to the lender to “draw” a certain amount when you need to pay off various aspects of the project. Because you only pay interest on the amount of funds that you’ve actually drawn out of the credit line, the interest on this type of loan won’t start until you’ve submitted your first draw – and, the interest will only be charged on the amount of money that you have used.

For instance, if you have a construction loan of $300,000 and you make your first draw for $50,000 to pay for a portion of the services performed, you will only be charged interest on that $50,000 – at least until you make another draw.

When it comes to having a down payment for your construction loan, different lenders will often work differently. In some cases, you may need to bring 20% to the table in order to qualify for this type of financing, while in other instances, while you may not be required to make an actual down payment, you will still need to have approximately 20% of the home’s value in equity somewhere (such as in the form of cash or other liquid investments).

Considering the building of a new custom home in Orlando or Central Florida? If so, give us a call and we can answer all of your questions about how to best move forward with your dream.