You’ve got the land, the plans, and maybe a Pinterest board full of dream kitchens—but before anything gets built, we need to talk money. Financing a custom home build isn’t like getting a regular mortgage. There are more moving parts, more paperwork, and way more room for surprises. I’ve seen homeowners sail through the process, and I’ve seen others hit delays that cost thousands.

The difference? The ones who understood how construction financing really works. Here are 5 things you need to know before you finance your build—with real-world insight from the contractor’s side of the job site.

1. Construction Loans Are Different Than Mortgages

A construction loan is a short-term loan that pays for your home as it’s being built—in stages. Once the house is finished, it rolls into a long-term mortgage.How It Works: The bank releases money in “draws” based on progress—like when framing or plumbing is done.

What That Means for You: You’ll pay interest only on the amount that’s been drawn. That could be $50k one month and $250k the next.

✅ To Do: Look for a one-time-close construction-to-perm loan to simplify the process and avoid paying closing costs twice.

2. You’ll Need More Upfront Cash Than You Think

With a resale home, your costs are mostly bundled into your mortgage. With new construction? Not so much. You’ll likely need: a 10–20% down payment, cash for permits, surveys, and architectural plans, a builder deposit (usually 5–10%), and funds for any soft costs not covered by the loan (like landscaping or upgraded finishes).

Contractor Insight: I always recommend clients keep at least 15–20% cash outside their loan. That buffer saves you when surprises hit—and they will.

✅ To Do: Make a separate “cash on hand” list: builder deposit, design fees, contingency fund, and early-stage costs.

3. Your Builder and Lender Need to Be in Sync

Each stage of construction requires an inspection and bank approval before funds are released. That means If your builder’s ahead of schedule but the bank’s slow with a draw? Delays happen.

If paperwork isn’t submitted correctly? Draws get held up.

Contractor Insight: I’ve had to pause jobs for a week while waiting on bank inspections. A builder who understands draw schedules can keep things moving.

✅ To Do: Ask your builder if they’ve worked with your lender—or any lender. If not, make sure they understand the draw process inside and out.

4. Plan for Surprises—Your Loan Won’t Cover Everything

No matter how good your plan is, costs creep. Change orders, material delays, or utility hookups can all hit unexpectedly—and your loan might not cover them.

Example: A client of mine once had to switch HVAC systems mid-build. It cost an extra $12,000. Because they had a buffer, it wasn’t a disaster.

✅ To Do: Build a contingency fund of 10–20% outside your loan. If you don’t need it, great. But if you do, you’ll be glad it’s there.

5. Pre-Qualify Before You Start Designing

The biggest mistake I see? Homeowners fall in love with a design before they know what they can afford to build. That leads to heartbreak—or major redesigns.

Why It Matters: Your total loan must cover the land, build, and soft costs. If you overshoot before the lender approves it, you’ll be stuck.

✅ To Do: Meet with a construction-friendly lender early. Bring your builder into the loop to shape a realistic plan that fits your financing.

Final Thoughts:

Know Your Numbers and build with Confidence! Financing a custom home build doesn’t have to be overwhelming—if you go in prepared. A solid understanding of how construction loans work, how draws are scheduled, and what you’ll owe out of pocket can mean the difference between a smooth build and a stressful one.

Work with a lender who understands the process. Partner with a builder who communicates. And most importantly? Budget for the surprises you can’t see yet.

Got questions about financing your custom home?

Drop them in the comments—we’ve helped dozens of families build smarter and avoid costly surprises. Want more contractor tips, real-world insights, and pre-build checklists? Follow us for the latest!