Buying a newly built home is an exciting prospect — you get to choose your finishes, enjoy modern systems, and move into a home no one has lived in before. But financing a new construction home works very differently from buying an existing property, and understanding the options available to you can save you significant money and prevent costly surprises.
This guide covers the main financing options for new construction — from construction-to-permanent loans to builder-offered financing — explains the key differences from standard mortgages, and helps you navigate the unique challenges of financing a home that does not yet exist.
Key Takeaways
- Construction loans are short-term loans that fund the building process — they convert to a permanent mortgage at completion.
- Builder financing can be convenient but may not offer the best rates — always compare with outside lenders.
- New construction purchases often require longer rate lock periods — 90 to 180 days or more.
- The appraisal for new construction is based on plans and comparable sales, not a completed home.
- Builder incentives like rate buydowns can be valuable — but read the fine print carefully.
Types of New Construction Financing
Construction-to-Permanent Loan (One-Time Close)
A construction-to-permanent loan — also called a one-time close or OTC loan — combines the construction financing and the permanent mortgage into a single loan with one closing. During construction, you pay interest only on the funds drawn. When construction is complete, the loan automatically converts to a standard amortizing mortgage. This approach saves you from paying two sets of closing costs and locks in your permanent rate at the start.
Two-Time Close Construction Loan
A two-time close involves two separate loans: a short-term construction loan that funds the build, and a new permanent mortgage that replaces it at completion. You pay closing costs twice, but this approach offers more flexibility — you can shop for the best permanent mortgage rate when construction is complete rather than locking in at the start.
Builder Financing (Production Builders)
Large production builders — companies that build entire communities — often have their own affiliated mortgage companies and offer builder financing incentives such as rate buydowns, closing cost credits, or free upgrades in exchange for using their preferred lender. These incentives can be genuinely valuable, but the underlying interest rate may not be the most competitive. Always get a quote from an outside lender to compare.
| Financing Type | Closings | Rate Lock | Best For |
|---|---|---|---|
| Construction-to-Permanent (OTC) | One | Locked at start | Custom builds, rate certainty |
| Two-Time Close | Two | Locked at completion | Flexibility on permanent rate |
| Builder Financing | One (at completion) | Varies | Production home buyers seeking incentives |
How Construction Loan Draws Work
Construction loans do not disburse the full amount at once. Instead, funds are released in draws — scheduled disbursements tied to construction milestones such as foundation completion, framing, rough-in of mechanical systems, and final completion. A lender-appointed inspector typically verifies each milestone before releasing the next draw. During construction, you pay interest only on the amount drawn, not the full loan amount.
The New Construction Appraisal
Because the home does not yet exist, the appraisal for new construction is based on the plans, specifications, and comparable sales of similar completed homes in the area. This is called an “as-completed” appraisal. If the appraised value comes in below the purchase price, you may need to renegotiate with the builder or cover the gap in cash — just as with an existing home purchase.
Builder Incentives: What to Watch For
Builder incentives like mortgage rate buydowns can be genuinely valuable. A 2-1 buydown, for example, reduces your rate by 2% in year one and 1% in year two before settling at the permanent rate — lowering your initial payments significantly. However, some builders offer incentives only if you use their preferred lender, which may not offer the best overall rate. Calculate the total cost of the builder’s package versus an outside lender before deciding.
“Builder incentives are real money — but so is the interest rate on a 30-year mortgage. Get a competing quote from an outside lender before accepting any builder financing package. The comparison might surprise you.” — Independent Mortgage Broker
FAQ
Do I need a construction loan to buy a new build from a production builder?
Not necessarily. When buying from a production builder — a company that builds homes in planned communities — the builder typically finances the construction themselves and you simply apply for a standard mortgage that closes when the home is complete. Construction loans are more commonly needed for custom builds where you hire your own contractor and need to fund the construction process yourself.
How long does a rate lock need to be for new construction?
New construction timelines are unpredictable — delays due to weather, supply chain issues, or labor shortages are common. Most new construction purchases require rate locks of 90 to 180 days or longer. Extended locks cost more than standard 30 to 60-day locks, but they protect you from rate increases during the build. Some lenders offer float-down options on extended locks, allowing you to capture a lower rate if market rates fall before closing.
What happens if the builder delays completion past my rate lock expiration?
If your rate lock expires before the home is complete, you will need to extend the lock — typically for a fee — or accept the current market rate at closing. Some builders include provisions in the purchase contract to cover rate lock extension costs if delays are their fault. Review your purchase contract carefully and discuss rate lock extension policies with your lender before signing.
Can I use an FHA or VA loan for new construction?
Yes. FHA and VA loans can be used for new construction, but the process is more complex. The home must meet FHA or VA property standards, and the builder must be FHA or VA approved. FHA offers a one-time close construction loan program. VA also has a construction loan program, though fewer lenders offer it. Working with a lender experienced in government-backed construction loans is essential for a smooth process.