If you have been house hunting but can’t find something that piques your interest, you may have considered building your own house. Of course, building your own house comes with certain advantages, including getting what you want in the first round. In addition, most new houses are more valuable than older ones.

One factor you must consider as a first time homeowner when a building is financing. Most people opt for a mortgage when moving to an existing property. But what do buyers interested in building their own homes do?

If you are a first time buyer, you may wonder what type of financing is available for you. One of the options you could consider is a construction loan. But can a first time home buyer get a construction loan? Before getting a construction loan, let’s dive in for the answer to these questions and factors.

What Is a Construction Loan?

Let’s begin by defining what a construction loan is. According to

Investopedia, a construction loan is short-term financing for home building or any other real estate project. The builder has access to financing commensurate with the project’s needs.

A construction differs from the traditional mortgage in that it’s short (around one year) and has higher interests. Another major difference is the loan distribution. With a construction loan, you get the financing in stages and on a need basis. Consequently, you only pay interest on the money you directly used on the project.

Types of Construction Loan

Before answering whether first time buyers get a construction loan, let’s look at the different types of construction loans available. Construction loans differ by purpose and usage

  • 1.

Construction to Permanent Loan: It allows you to get financing for building your house, and once you are done, you can convert it to a mortgage loan. In essence, you will have two loans with different interests. Construction to permanent has the advantage of convenience and no closing costs.

  • 2.

Construction-Only Loan: The builder or home buyer gets financing for their home, but they take care of their financing once the project is done. They can repay the loan in full or opt for a mortgage. One disadvantage of the construction-only loan is the costly closing costs.

Why You Might Consider a Construction Loan

Before we explore whether a first time buyer can get a construction loan, you may wonder: do you need one in the first place? Owning a home is a lifetime investment. But it never comes cheap. Whether you buy a house or build one, you must prepare financially. Apart from a college education and retirement savings, owning a home is one of Americans’ most financially-intense projects.

Only a small percentage of people can put a 100% down payment on a house. Most people use a long-term financing strategy, including taking construction loans. According to a report by S&P Global Market Intelligence, the loan volume amounted to $92.4 billion in the first quarter of 2022.

The whole project might involve many aspects that require resources. You may not have considered some of these expenses and logistics, but they will affect where your finances go. Here are six factors that might necessitate getting a construction loan. Let’s answer the question, “Can a first time home buyer get a construction loan?”

You Must Move

If you are building a home, you live somewhere else, probably renting. Once your house is complete, you’ll have to move. Moving might seem like a trivial thing in light of building a home, but it is not an insignificant logistic.

Moving costs depend on your location. You are likely to hire a moving company or local movers. Professional movers use a per-hour or per-move basis with an extra cost depending on either weight or hours.

According to Zillow, the average charge per hour is $80-100 for a local move. Doing an interstate movement will cost you $2000-5000 per move and an additional $0.50 per pound for extra weight. Although these costs are estimates, they show that moving is a cost you must plan for.

Starting a Home from Scratch Can Be Difficult

Some people opt to buy a home to avoid the hassle of building a home from scratch. But the choice of building or buying has no better side. Each has pros and cons. Building from scratch might be an intense process, but then you get to build your kind of house, so you’ll never need major renovations.

Building a house from scratch might not be intensive if you have normal terrain land. In such a case, you might only need general excavation services to level the terrain before a foundation is laid. Yet even with general excavation, you might not have incorporated the cost of building from scratch.

In other cases, you might need backhoe rentals to work on smooth or rough terrain. Of course, your professional builder will handle the actual ground leveling, but you need to be aware of the general steps they will take in house building. All this process require funds, and this is where a construction loan comes in handy.

Lots of Materials Need to Be Transported

One of the reasons you may ask: can a first time buyer get a construction loan is the realization of the many materials that need transporting? A construction loan will typically finance the materials needed for the building project and any other expenses related to the building. The expenses will go up if your land is far from supply stores.

You might need overhead crane services to offload supply materials at your property. If your house project is massive, it will require more materials. This includes cement, metal, roofing materials, and heavy doors. While builders can handle some weight, most will require a heavy hauling service provider to plan the offloading.

The building project will also generate waste like tiles, tree stumps, and other heavy waste materials. You might need heavy hauling machines to get rid of the waste. Therefore, material transportation will require financing either through your savings or through a construction loan.

Consider the Foundation

You have probably already thought about your home’s foundation. Although the foundation of your house will take only a small percentage of your total budget, a good foundation is essential for the longevity and integrity of your house. According to Home Guide, a typical foundation costs $9260 on average. Of course, other factors such as terrain, soil type, and the number of levels in a house will also play a role.

Concrete and steel are the most common materials used in construction. So you might need to look for cement companies. The foundation must be steady and capable of resisting earth shakes, extreme temperatures, and groundwater. Your builder will consider your land and its condition to determine the kind of foundation to put up. A construction loan will cover every material you need for your project, including cement, steel, labor, and other expenses related to developing a foundation.

You Need a Safe and Secure Driveway

At this point, you may ask, can a first time buyer get a construction loan to develop your driveway? Yes, they can. A construction loan covers everything involving your building project, including your driveway. All you require is to include it in your building plan.

Your home may be brilliantly done, but you still need a safe and secure driveway. You would need asphalt pavers if you chose to do an asphalt driveway. It’s low-maintenance and gives the home a beautiful look. You might also need wheel repair, so your driveway is a significant investment that will require resources.

A safe and secure driveway has no potholes or unfinished sections. It’s impervious to regular weather patterns. There are no sharp edges or slippery sections. You could use either asphalt or cement.

You’ll Need Regular Property Maintenance

During and after construction, your property will require maintenance. Of course, some home elements may require less attention than others. For example, your roofing may require less maintenance than your HVAC system. So, can a first time buyer get a construction loan for regular property maintenance? Well, your construction loan will only cover the building phase, after which you can get a mortgage.

However, within that year, some project aspects, such as the swimming pool and lawn, require regular maintenance. You may want to move into the property once the lawn is brown and green. In that case, lawn care will be part of the building project and can be covered under the construction loan.

Can a First Time Home Buyer Get a Construction Loan? How Construction Loan Works

So, can a first time buyer get a construction loan? The short answer is yes.

Construction loans are crafted with all types of home buyers in mind. Of course, you need to meet some basic requirements that we will look into, but being a first time buyer won’t disqualify you from getting a construction loan.

If you plan on getting financing through construction loans, you should start preparing early to make the approval process easier. You could also consider the pros and cons of having a construction-permanent or construction-only loan.

Construction loans are not disbursed as a lump sum. Application begins through the submission of financials, building plans, and documents. After an approval process, you can start accessing the funds. You’ll get a disbursement after each phase. For example, Once you complete the foundation, you’ll get a disbursement. You will only pay interest after construction is complete. Once construction is complete, you can opt for a mortgage loan

Construction loans work differently from mortgage loans. In a conventional mortgage loan, lenders require that the financing goes towards the purchase of a property. They take about 20-30years to mature.

With construction loans, you are restricted in using the capital, but you can use the money to buy materials, equipment, and land. You can also use it to pay for permits or any other expenses associated with the home-building project. You will also pay the interest within one year.

Requirements for a Construction Loan

Can a first time buyer get a construction loan? It depends on if they meet the requirements. In theory, you should access a construction loan whether you are a first time buyer or not. However, if you do not meet the requirements, you may not get a construction loan as a first time buyer. Here are some basic requirements you should meet before lenders can approve a construction loan.

Good Credit Score and Financial Stability: You must prove to your lender that you can pay a loan. They will look at your income and its stability and credit score. Ideally, it should be at least 680.

Licensed Builder: Unless you are a licensed builder, most lenders will not give you a construction loan if you plan on doing a DIY home. You might need to provide evidence that your builder is licensed to handle that kind of project.

Documented Building Plan: Your lender will want to see what you intend to do at your property. If you plan to do a swimming pool, include it in the plan.

In this article, we have pondered the question: can a first time buyer get a construction loan? The answer is yes. No limitations are put on first time buyers in accessing a construction loan. However, you may not access a construction loan if you do not meet basic requirements such as having a good credit score.

You may require a construction loan to finance your home-building project. Some logistical aspects, such as moving and building a safe driveway, may be forgotten during project planning, yet they play a critical role in home-building success. Contact prospective lenders early on to learn about your eligibility and how a construction loan can help you build your dream house. This can help you answer the question, “Can a first time home buyer get a construction loan””