A construction contract can look straightforward until the first question arrives: who pays the builder before the home exists? That is the practical issue behind how to finance a construction home. Unlike a resale purchase, your financing must account for the lot, plans, permits, inspections, staged builder draws, and the permanent mortgage that follows completion.
For buyers planning a custom home in Short Pump, Glen Allen, Midlothian, Chesterfield, or the City of Richmond, the best structure is not always the one with the lowest advertised payment. It is the one that fits the lot status, builder requirements, cash reserves, credit profile, and realistic completion timeline.
By Duane Buziak, NMLS #1110647
Table of Contents
- The two primary ways to finance construction
- Start with the lot and total project budget
- Construction draws, inspections, and timing
- A worked payment and savings example
- Why broker access matters
- Credit planning before you build
- Construction-home financing FAQs
How to finance a construction home: choose the right structure
Most buyers use one of two approaches. A one-time-close construction-to-permanent mortgage begins as construction financing and converts to a long-term mortgage after the home is complete. You generally close once, establish permanent financing terms up front, and avoid a second closing event when the house is finished.
A two-close structure uses separate construction financing first and permanent financing later. This can make sense when a builder, land purchase, or project timeline requires more flexibility. The trade-off is uncertainty: the permanent mortgage is obtained later, so future pricing, qualification standards, and closing costs may differ from what you expected when construction began.
Neither option is automatically better. A one-time-close option often appeals to buyers who want certainty before breaking ground. A two-close approach can work when the project is changing, the lot is being acquired separately, or the builder has a specific process. A mortgage broker can compare available structures across multiple investor programs rather than forcing every construction project into one shelf of options.
Start with the land, builder, and full project budget
Construction financing starts with a complete project picture, not just the home’s estimated price. The broker and program underwriter will typically evaluate the lot value, construction contract, builder credentials, house plans, specifications, permits, contingency reserve, and expected completed value.
If you already own the lot, its equity may help satisfy part of the required contribution. If you are buying land and building at the same time, both pieces may be wrapped into the transaction when the program permits it. Do not assume that a vacant lot automatically counts dollar-for-dollar as down payment. The title status, outstanding debt, appraisal, and construction program rules all matter.
A useful planning benchmark is Henrico County’s approximately $400,000 median sale-price level in recent market reporting. That figure is not an appraisal and does not determine a custom build’s value, but it illustrates why buyers building above the local median need to plan carefully for appraisal support. A $700,000 build in a neighborhood dominated by $400,000 sales can create a valuation challenge even when the design is excellent.
Your total budget should include more than the builder’s base contract. Site work, utility connections, grading, septic or well work, driveway costs, change orders, landscaping, interest during construction, and a contingency reserve deserve a line item. The expensive surprises are usually outside the kitchen-and-bath selections buyers remember to price.
Understand draw schedules before signing a contract
Construction funds are released in draws as work is completed. A common schedule may include draws for the foundation, framing, mechanical systems, drywall, and final completion. Before each draw, an inspection generally confirms that the stated work is in place.
During construction, payments are often based on the amount disbursed rather than the full permanent balance. That can make the early monthly payment lower, but it rises as more funds are advanced. A delayed inspection, weather issue, material shortage, or permit revision can affect the draw calendar and the overall timeline.
Ask the builder how often draws are requested, who coordinates inspections, whether supplier liens are addressed at each phase, and what happens if the project exceeds the original budget. A builder who has completed financed construction projects before can make the process materially smoother.
A worked construction-home financing example
Here is a simple payment comparison using one fixed loan amount. Assume a $600,000 completed project with a $50,000 required contribution. The resulting permanent mortgage is $550,000 on a 30-year fixed term.
At an illustrative 6.75% rate, the principal-and-interest payment is approximately $3,568 per month. At an illustrative 7.125% rate on the same $550,000 balance, the principal-and-interest payment is approximately $3,705 per month.
The difference is $137 per month. Over five years, the math is $137 × 60 payments = $8,220 in payment savings. This example excludes taxes, insurance, mortgage insurance, builder fees, and the difference in remaining loan balance after 60 payments. It is not a rate quote, but it shows why small pricing differences matter on a larger custom-home balance.
During construction, if the average outstanding draw balance is $275,000 and the interest-only rate is 6.75%, estimated monthly interest would be $275,000 × 0.0675 ÷ 12 = $1,546.88. That figure changes with every draw, which is why reserve planning matters.
Broker access versus a single-source process
Construction financing is specialized, and requirements vary significantly by program. Some programs allow a borrower-owned lot. Some require approved builders. Some accommodate larger loan amounts, while others are better aligned with conventional, FHA, VA, or jumbo scenarios.
| Financing channel | Rate access | Typical FICO flexibility | Investor access | Pre-approval approach |
|---|---|---|---|---|
| Mortgage broker | Can compare eligible program pricing across wholesale options | Depends on the selected program and investor guidelines | Multiple investor relationships | Can review project, lot, builder, income, and credit together |
| Bank | Generally limited to its own available programs | Set by its internal program rules | Single institutional platform | May require a standard approval before construction review |
| Online platform | May offer standardized pricing for defined scenarios | Often best suited to conventional documentation profiles | Platform-specific options | Often begins with a digital application before detailed builder review |
Richmond Mortgages works with more than 500 wholesale investor relationships, which matters when the project does not fit a plain-vanilla purchase profile. That does not mean every buyer qualifies for every option. It means the comparison can begin with the facts of the project instead of a single program’s limitations.
Protect your credit while you plan
Construction buyers often need time to finalize plans, choose a builder, and evaluate land. That is where a soft credit pull mortgage review can be useful. Richmond Mortgages offers NoTouch Credit Pull so buyers can start a conversation without immediately committing to a hard inquiry.
If you are researching a no hard inquiry mortgage pre approval, ask what the initial review actually includes. A mortgage pre approval without hard pull can help identify likely issues, but final approval still requires complete documentation and a credit process that meets program requirements. A soft pull mortgage broker review is a planning tool, not a substitute for underwriting.
Use NoTouch Credit Pull early if you want a no credit hit mortgage application discussion while comparing lot and builder options. Avoid opening new credit accounts, financing furniture, or making large unexplained deposits before closing. Construction underwriting may review your file more than once because the timeline is longer than a typical resale transaction.
Construction-home financing FAQs
1. Can I finance the lot and construction together in Richmond?
Often, yes, when the program allows a land purchase and build in one transaction. The lot, builder contract, and completed-value appraisal must support the structure.
2. Can lot equity count toward my contribution?
It may, depending on title ownership, current debt, appraised value, and program rules. The equity must be documented and accepted by the selected program.
3. How long does a construction home take in Midlothian or Glen Allen?
Many builds are planned for roughly 9 to 14 months, but permits, weather, site work, and material availability can extend that schedule.
4. What price tier needs jumbo construction financing?
It depends on the county loan limit, final loan amount, and program rules. Higher-end homes in Short Pump or Lake Anna often require a jumbo review.
5. Can veterans use VA construction financing?
Eligible veterans may have VA construction options available, subject to property, builder, entitlement, and program requirements.
6. What if I am self-employed?
Self-employed buyers may qualify using tax returns, business documentation, bank statements, or other permitted documentation methods, depending on the program.
7. Does the builder need approval?
Usually, yes. The builder’s experience, licensing, insurance, contract, and financial information may be reviewed before construction financing is approved.
8. When should I start the financing process?
Start before signing a land or builder contract. Early review gives you time to assess cash reserves, credit, projected payment, and the program’s builder requirements.
A well-financed build gives you room to make good decisions before concrete is poured. Bring the lot details, preliminary plans, builder contract, and honest budget to the first conversation, then let the financing structure support the home you actually want to build.
Not a commitment to lend. Rates subject to change. Equal Housing Lender.
Duane Buziak | Mortgage Maestro | NMLS #1110647 | Coast2Coast Mortgage, LLC NMLS #376205 | Licensed in VA, FL, TN, GA & DC [Contact] | NoTouch Credit Pull available — no hard inquiry, no credit hit.