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Construction Loans: The Journey to Building Your Dream Home

House Being Built at Sunrise

As the housing market continues to face a shortage of homes, building your next place to live can be an increasingly attractive idea. The possibilities of what you can build can be endless, and the process can afford you more options and flexibility than the limited inventory of existing homes. It is important to understand the timeline and associated costs. Building a home may take longer and have higher costs than you might expect. Let’s go over some of the options for building your own home and what the process looks like.



Traditional, single-family homes: These are often referred to as “stick-built” homes in the construction industry. Traditional, single-family homes are built on-site, on the land the homeowner has purchased, using lumber (aka “sticks”).


Multi-unit homes: There is also an increased interest in building multi-unit homes. These can include properties that are officially zoned as more than one unit or single-family properties with an accessory dwelling unit (ADU). These are all typically stick-built as well. A home like this could allow you to live in one unit and rent out the other unit(s) for additional income. A multi-unit home could also be used to support family members.


Manufactured and modular homes: There are many other options available as well. Two of the most common we see today are manufactured homes and modular homes. In some cases, the wording is used somewhat interchangeably between these home types because they are both considered prefabricated, meaning they are made in a factory away from the site where the home will ultimately be. However, it is important to understand the differences between each as there are different financing restrictions based on the type of home you’re building.


One of the differences is how many pieces they arrive to the site in: modular homes may arrive in multiple pieces and be put together on-site, while manufactured homes arrive to the land completed in one piece. Modular homes are subject to the same state building codes as stick-built homes, whereas manufactured homes must meet Department of Housing and Urban Development (HUD) guidelines. There are special grants available for building different home types, so talk to a knowledgeable local lender if you’re interested.


House in field

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The exact process you follow for building a home is going to depend on a few different items. Do you already own land or is land available? Have you identified a builder and discussed their timeline? There are different routes we see construction loans taking in this market, which can result in two to three closings depending on what your starting point is.


Land Loan: If you do not own a parcel of land and are not ready to build right away, you will likely need to begin with a land loan. You will need to find a lender with land loan program, which typically requires a 20% down payment. You would likely work with a realtor to identify a parcel of land and make a successful offer. Once you purchase the land, you’d have as much time as you need to identify a builder and design the home you want to build. When you’re ready to build, you would then move into a construction loan.


Home Design: If you already have land or have access to land through a family member, such as them sub-dividing a parcel to you, the first step is to work with a builder and design the home you want to build. A mortgage loan officer can meet with you as you take this step to run preliminary numbers so you have an idea of what you can afford to build. A lender will not move into a construction loan until you’re ready to build, with all plans and specs complete, and the timeline for competition is typically within one year.


Construction Loan: The construction loan is typically a two-part closing process.  The first loan is the construction loan, which is a six- to 12-month loan with interest-only payments due, based on what is drawn at any given time. There are inspections that take place along the way before funds are given to your general contractor as work gets completed.


Contingency Plans: Additionally, you will want to plan for the unexpected. When building a home, there are items that can come up during the process that may not have been planned for. It is a requirement for most lenders to have a contingency worked into the contract or the loan so there are additional funds to rely on should any surprises pop up along the way.


Final Financing: The next closing takes place when the home is 100% complete. This is called your final financing. This final loan could be a range of programs, for example a 30-year fixed-rate mortgage or an adjustable-rate mortgage. The final financing rates will depend on what market rates are when the home is complete, which is a variable to keep in mind. If you are financing above 80%, private mortgage insurance will apply for the final loan.


The construction process requires more intensive paperwork than buying an existing home but yields very exciting results when you can truly design and create the home of your dreams.


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Annie Rogers Headshot

About Annie Rogers

Annie has been a consistent presence at the credit union for 20 years, with mortgage experience spanning 15 years. As a Mortgage Origination Supervisor, she proudly stands with her team and enjoys helping borrowers reach their goals of homeownership. A lifelong Vermonter, Annie resides in Williston with her husband, two kids, and dog.

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