Designing and building your dream home is one of the most exciting journeys you can take as a homeowner. From choosing the perfect layout to selecting every finish, creating a custom home means your space reflects your style, needs and goals. But before construction can begin, understanding how to finance the process is key. That’s where construction loans come in.
Unlike buying an existing home, building from the ground up requires a different type of loan designed specifically for new construction. At Schaeffer Homes, we specialize in custom-built homes across the Tri-State Area, including parts of New Jersey, Delaware, Maryland and Pennsylvania. We work closely with buyers to help them understand their financing options, including what a construction loan is.
A construction loan is a short-term loan used to finance the process of building a home. These loans differ from traditional mortgages because they aren’t designed for move-in-ready homes. Instead, they provide funding in phases as different parts of the home are completed.
The funds can cover various expenses, including land acquisition, materials, labor, permits and inspections. Because construction loans are structured around progress, they help ensure that builders and contractors stay on track throughout the process.
Construction loans operate on a draw schedule, which means funds are released in stages. The lender disburses payments as milestones are completed instead of receiving the full amount at once. These could include laying the foundation, finishing, framing or completing plumbing and electrical systems.
Each draw typically follows an inspection to verify that the work has been completed to the agreed standards. This protects the lender and homeowner by ensuring the project stays within budget and on schedule.
There are two common types of construction loans. The first is a construction-to-permanent loan, which starts as a construction loan and then automatically converts into a traditional mortgage once the home is finished. This approach simplifies the financing process since you only go through one loan closing.
The second option is a standalone construction loan. This type covers the building phase only, and when construction is complete, you’ll need to apply for a separate mortgage to pay off the construction loan. While this requires two closings, it can work well for buyers with specific financial strategies or plans to shop for mortgage terms later.
Traditional mortgages are designed for homes that are already built. You receive a lump sum upfront and start making monthly payments right away. On the other hand, construction loans are designed for homes that don’t yet exist. Funds are released in stages, and you often only pay interest on the money that’s been drawn.
Another key difference is how lenders view the risk. Since a construction loan is based on a home that has yet to be built, the approval process is more complex and requires detailed planning and documentation.
Getting approved for a construction loan involves more steps than a standard mortgage. Lenders want to be confident the home will be completed on time and on budget, so they’ll ask for a strong credit history, stable income, a down payment and a thorough construction plan.
The plan needs to include everything from blueprints and a construction timeline to a detailed budget and the credentials of the builder. This gives lenders the information they need to assess the project's viability and minimize risk.
The draw schedule plays a crucial role in how construction loans function. Instead of giving you all the funds upfront, your lender will distribute money based on progress checkpoints. Each phase—such as laying the foundation, completing the framing or installing finishes—must be completed and approved through inspection before the next draw is issued.
This structure helps keep your project accountable. It also ensures that funds are only used for actual construction progress, not unrelated expenses.
Construction loans typically require a larger down payment compared to traditional mortgages. That’s because lenders take on more risk when financing a project that hasn’t yet taken shape. However, securing a loan with little down through one of our preferred lenders is possible depending on your credit and qualifications.
This lower entry point can make custom home building more accessible, especially with a detailed budget and a reputable builder.
To ensure the project is progressing as expected, lenders schedule regular inspections at each stage of construction. These inspections confirm that the work aligns with the approved plans and meets the required quality standards.
Once an inspection is completed, the lender releases the next round of funding. This helps maintain consistent oversight, ensuring the project stays aligned with the timeline and budget.
A traditional mortgage is often the most straightforward option if you're purchasing an existing home. But if you dream of a custom-built home with a personalized layout and design, a construction loan gives you the flexibility to finance both the land and the build.
This type of financing is tailored for those who want more control over the look, feel and function of their future home. While it may involve more steps, the result is a home that fits your lifestyle perfectly.
We work with trusted lenders who understand the ins and outs of construction financing. These relationships help make the approval and draw process easier to manage, so you can stay focused on the exciting parts of building your home.
With decades of experience, a commitment to quality and a personalized approach to every project, we help guide buyers through each step of financing and building their custom home.
Understanding construction loans is one of the first steps toward turning your vision into a reality. From the moment you decide to build a custom home to the day you move in, financing plays a central role in your journey. With the proper loan structure and an experienced builder by your side, the process can be smooth, rewarding and even enjoyable.
If you're ready to explore your options and start building your dream home in New Jersey, Delaware, Maryland or Pennsylvania, reach out to us. We’re here to help you design the perfect home and connect you with financing solutions that make it all possible.
