If you’ve been thinking about building your own house — or even simply making modifications to a fixer-upper — you might be curious about the finances of the situation. It’s no secret that it takes both effort and money to build houses. And while you can take out a loan for a house when you buy one, what happens when you build one? If you can borrow money to buy a house, you should be able to borrow money to build one, right?
The answer, like with many things, comes in parts. And we’re here to break it down for you.
Just like anything, your home is unique to you and your family. You have your own homeowner — and home-builder — journey that should be tailored to your needs, and that includes the financial element.
Whether you’re going big and natural, tiny, off the grid, or something else entirely out of the ordinary, there are ways to handle the finances. For all those builders out there, here’s what you need to do to get started on your new home.
What Is a Mortgage?
When it comes to borrowing money for any kind of house ownership, the most basic place to start is the purpose of a mortgage.
In standard practice, a mortgage exists so you can make a down payment on an existing house and move in, paying off the remainder to the bank over a number of years or decades.
To qualify for a mortgage, you usually need to have good credit, a good credit history, not have any large or outstanding debts, and meet any other criteria the bank or lender deems fit.
While you might need to borrow a similar value to that of a mortgage when building your own house, there’s also a possibility that a mortgage won’t be exactly what you need. Really, it depends on your situation and plans.
Who Needs a Mortgage?
If your mind is still on mortgages, now could be the time to start questioning. While some builders do need mortgages, other building, and building-related projects require different types of loans.
First, let’s start by hashing out the situations in which you might be able to swing a conventional mortgage.
If you’re buying land with a building already on it that you plan to demolish and build on, you’ll likely be able to take out a mortgage on the place itself, since you’re buying property. Similarly, if you’re flipping an existing house or buying a fixer-upper, a conventional mortgage will usually do.
However, the same can’t usually be said for renovation costs on a new property or a property you already own. Essentially, if you’re buying an existing house for the purposes of your build, you can usually just go with a conventional mortgage.
Building From the Ground Up
If you want to build a conventional home from scratch — no matter where you do it — and you want a loan for that, you’ll need to seek a construction loan. Usually called a construction loan, construction mortgage, or a self-build loan, these loans are usually short-term loans that cover the cost of the build.
For the most part, you can expect these loans to last around a year, which is quite short compared to standard mortgage loans, mostly because the variable rates are higher. At the end of that first year, most lenders will give you the option to refinance into a standard mortgage or get a new loan to pay off the construction loan.
As mentioned above, renovation plus house flipping usually goes by standard mortgage rules. If you’re buying that fixer-upper, you can get a loan for the property itself, but just not for the cost of building materials.
If you’re going with standard construction, you need somewhere to put it! Unless you already own land or want to expand property you already own, you’ll need to buy some land. Usually, this means you’ll be taking out a land loan.
Similar to a standard mortgage, there are a few financing options you can look into when getting a land loan, but these options vary based on the kind of land you’re buying. And much like the building loan, it covers only the cost of what you’re taking out the loan for.
So, your land loan can only be used for the cost of buying land. That means materials, the necessary permits and insurance, labor, and anything else you might need to build are your responsibility.
But what if a standard house with its feet on the ground and its roots in the land isn’t exactly what you have in mind? What if you have a wanderlusting soul and the itch to live tiny, go off the grid, or try your hand at living alternatively?
If that sounds like you, there are a few options and hurdles that might come into play based on your situation.
First, if you want a home that can travel — like a van, an RV, a tiny house on wheels, or anything that doesn’t have a fixed address — a mortgage isn’t what you’re looking for. You’ll likely be looking at a vehicle loan of some kind for projects like that.
When it comes to stationary tiny homes — whether they’re ADUs on the current property you own or tiny homes with their own land — the loan situation becomes a bit trickier.
If you’re working with a tiny home builder or building company, they may be able to secure your loan. However, independent builds usually need to come from your own pocket. The thing is, tiny homes can start at the $50,000 mark or even cheaper than that, so you can save up towards one rather than taking out a loan.
Renovations on Your Current Home
When it comes to current renovations on your home, you’ll likely need to shell out the cash for that unless you can secure a specialized private loan. Without the intent to purchase new land or property, mortgages and land loans are usually out of the question.
Just like any loan, mortgage, or financial move, it’s important to shop around and get a view of all your options — not only is it important to check out competing offers and quotes, but also see which loan type is best for your situation. There are so many different types of builds, and it’s about figuring out the right option for you.
What Loan Do You Need?
When building a house, your loan of choice can be determined by a number of factors. No two builds are alike, whether you’re going tiny or going all-out large and in charge. Take stock of your situation and start to take a look at your options, and you’ll be building in no time!
by: Rose Morrison
Rose is the managing editor of Renovated and a real estate industry writer.