HOW DOES NEW HOME CONSTRUCTION FINANCING WORK?

A construction loan is unique financing that allows home owners the opportunity to finance the construction of a home, including if you own the land/home or if you are looking to acquire property.

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Unlike a traditional mortgage, construction financing works in two phases.

The Construction Phase: Sometimes called a “draw” period, funds are advanced in stages to pay for the construction of your new home. During this time, you only make interest payments on the funds that have been dispersed.
The Permanent Phase: Upon completion of the home, the construction loan seamlessly modifies into a permanent mortgage—the phase most homebuyers are familiar with.

Securing your own construction financing offers several financial advantages compared to buying a finished, “turnkey” new construction home from a developer.

Advantages of a
Construction-To-Perm Loan

CARRYING COSTS

Turnkey home prices typically include the builder’s carrying costs, such as land interest, construction loan interest, insurance, and overhead.
A construction-to-perm loan allows you to handle the financing directly.
Holding the loan yourself avoids the risk premiums and mark-ups builders often add to finished homes.
This approach provides transparency into where your money is going.
It keeps your total investment closer to the true cost of construction.

TRANSFER TAXES

In Maryland, transfer taxes and recordation fees represent a major closing expense.
Finished homes are taxed based on the total combined value of the house and the land.
Purchasing a lot from a third party via a construction-to-perm loan allows you to separate the land purchase from the construction contract.
This strategy may result in paying transfer taxes only on the land value rather than the future home.
Depending on local rules and deal structure, this can significantly reduce your tax burden compared to buying a completed residence.

ONE-TIME CLOSE

With a construction-to-perm loan, financing automatically converts into a permanent mortgage once the home is finished.
This requires only one closing instead of two.
This eliminates duplicate lender fees, title charges, and settlement costs.
Managing a single transaction avoids redundant underwriting.
This approach reduces recording-related fees, making the loan process simpler and more cost-effective.

RATE PROTECTION

Your appraisal is completed “subject to” the completion of the home.
Many construction-to-perm loans allow you to lock your interest rate upfront.
This protects you from unpredictable rate hikes while your home is being built.
The rate you secure typically carries over to your permanent loan.
Locking early avoids the risk of rising rates and lowers your total interest expense over the years.

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Preferred Lenders

We have searched for the most competitive construction-to-perm loan programs in the mortgage industry coupled with excellent service from experienced and qualified loan officers.

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Available Homes & Homesites

Savings, tax benefits, and transfer-tax advantages may vary based on the buyer’s circumstances, loan structure, property location, and contract setup. This information is for general guidance only and should be verified with your lender, tax advisor, title company, or real estate attorney.

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