At BWD Construction, we understand that building your custom home is a major milestone, and navigating the financing process can feel overwhelming. Fortunately, we’re here to help guide you through every step, from finding the right loan to securing funding, so you can focus on bringing your dream home to life.
Whether you choose to work with one of our trusted partner banks (which we highly recommend for a faster, smoother process) or with a bank or credit union of your choice, here’s a breakdown of the construction financing process for residential properties in Colorado.
- Understanding Residential Construction Loans
Unlike traditional mortgages, construction loans are designed specifically to fund the building of a new home. These loans are short-term and disbursed in stages, or “draws,” as the construction progresses. Once your custom home is complete, the loan typically converts to a permanent mortgage or is paid off or you can seek a refinance with a long-term lender.
The construction financing process can be complex, but working with us and our close partner banks simplifies things. We can streamline communication and ensure the lender understands the intricacies of your project. Our strong relationships with these banks often lead to faster approvals and easier management of your loan.
Generally, you are only paying interest payments during the construction phase which makes it easier to keep paying your current living expenses and build a home.
- Steps to Secure Financing for Your Custom Home
Here’s what you can expect as you move through the financing process:
A. Prequalify for a Loan
Prequalification gives you an estimate of how much you can borrow, based on your income, credit score, and financial health. This step is crucial in determining your budget and helping you plan accordingly. If you work with one of our partner banks, this part of the process is usually faster.
B. Develop a Detailed Home Construction Plan
Lenders want to see that your project is well-organized and feasible. You’ll need to present:
- Blueprints and architectural designs of your custom home (which we assist with)
- A detailed budget outlining estimated costs for materials, labor, permits, and more.
- A clear timeline that highlights key construction milestones. (This step is due to these type of loans generally have a 12 month life.)
- Information about your builder (BWD Construction!), including our credentials and past project experience, to show the lender you’re working with a reputable and experienced team.
This detailed plan reassures the bank that your custom home will be completed successfully and within budget.
C. Apply for the Construction Loan
Once your plan is ready, you’ll apply for a loan. The application will involve submitting financial documents such as income statements, tax returns, and credit reports. Lenders generally require:
- A down payment, which typically ranges from 20-30% of the total loan amount.
- A loan-to-value (LTV) ratio calculation, which compares the loan amount to the expected value of your completed custom home.
If you’ve purchased land with cash, you can use this as collateral to reduce the amount of cash needed for the down payment.
D. Secure Builder’s Risk Insurance
Construction lenders require builder’s risk insurance to protect against potential issues such as damage to materials or delays in construction. This policy ensures that the project will continue without setbacks, protecting both you and the lender.
- Using Cash-Purchased Land as Collateral
One of the advantages of working with us at BWD Construction is that we can help you leverage any land you’ve purchased with cash as collateral to secure financing. Here’s how it works:
- Leverage Your Equity: If you’ve paid cash for the land where your custom home will be built, you have 100% equity in that property. This equity can be used as collateral, lowering the amount of cash you’ll need upfront for the loan.
- Improve Loan Terms: Using land as collateral can help you secure a larger loan or better interest rates because it reduces the lender’s risk.
- Simplify the Process: We’ll work with your lender to ensure that the equity from your land purchase is factored into the loan application. This can make the overall financing process easier and faster, especially if you use one of our partner banks, which already understands our process.
- What’s Required at Closing?
When you’re ready to close on your construction loan, it’s important to know what cash position you’ll need. Here’s what to expect:
- Down Payment: The typical down payment for construction loans ranges from 20-30%, depending on your financial situation and the lender’s requirements. If you’ve used cash to purchase land, some of that equity can be applied to this requirement.
- Closing Costs: These cover loan origination fees, title insurance, and other administrative expenses. Closing costs for construction loans usually fall between 2-5% of the total loan amount.
- Contingency Funds: Lenders often require a contingency reserve, usually around 5-10% of the loan, to cover any unexpected expenses during construction. This ensures the project can continue without financial delays if unforeseen costs arise.
- Why Choose BWD Construction’s Partner Banks?
We’ve developed strong relationships with several banks that specialize in custom home construction financing. By working with one of our partner banks, you benefit from:
- Faster approval times, since the lender is familiar with our building process and has experience with similar projects.
- Streamlined communication between BWD Construction and the lender, ensuring that everyone is on the same page and minimizing delays.
- Expert guidance from both the bank and our team, ensuring that you get the best financing options available.
However, we’re flexible! If you have a preferred bank or credit union, we’re happy to work with them as well to ensure you get the financing you need.
- Conclusion
Financing a custom home in Colorado may seem complex, but with the right plan and team in place, it’s a manageable process. At BWD Construction, we’re committed to helping you from start to finish—whether that’s securing a loan, managing your project, or working closely with your lender to ensure a smooth process.
If you’re ready to build your dream home, contact us today! Let’s explore financing options and get started on turning your vision into reality.
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BWD Construction is your trusted partner in custom home building, offering expert guidance on construction financing and collaborating with leading banks to make your dream home a reality.