New Home Financing: A Complete Breakdown

New Home Financing: A Complete Breakdown

Building a custom timber home is more than just a typical construction project. It’s the actualization of a dream and the beginning of a new chapter in life. For many, the thought of financing this dream can be daunting, and few actually follow through with the decision. However, with the right knowledge and guidance, navigating the nuances of new home financing can be an enlightening and empowering experience. So, how does a construction loan work? Here’s a comprehensive guide to help you understand the process and what to expect along the way.


Introduction to Construction Loans

Building a new home is a multifaceted endeavor that involves various components and their associated costs. For example, you’ll need to finance the land on which your home will be built, budget for costs of materials, skilled labor, and many other services. These costs are usually covered with a unique type of loan known as a “Construction Loan.”


Construction loans differ from traditional mortgages in several ways. Primarily, they are short-term loans that can typically range from 12 to 18 months, and they are designed to cover the costs of the construction phase. Instead of receiving the entire loan amount upfront, funds from a construction loan are disbursed in stages as construction progresses, and costs are incurred. This is beneficial as interest is only charged on the amount drawn from the loan, not the total loan approved.


When considering new home financing during this process, what about the land? Financing new home construction can include the cost of acquiring the land if it hasn’t already been purchased. Furthermore, any personal funds used before the loan are considered a “down payment or cash in the deal” and contribute to your equity in the project. If you already own the land, or it has been gifted to you, its current market value will be considered as part of your equity contribution.  


New Home Financing Prequalification

Financing new home construction begins with the prequalification process. Prequalification is a preliminary evaluation of your creditworthiness that allows you and your chosen bank to determine how much you can afford to borrow. This process provides you with a clear understanding of your budget, making it easier to plan your project effectively.


The prequalification process typically starts with an online application and involves a soft pull of your credit, which won’t negatively impact your credit score. It also requires a review of your identification and income-related documents such as pay stubs, W-2s, and possibly tax returns. Once submitted, the prequalification process usually takes as little as 24-48 hours, depending on the bank. With a clear understanding of your borrowing capacity, you can then proceed to the next stage: Full Approval.


Understanding and Navigating the Full Approval Process

Securing Full Approval for your construction loan involves several steps, requiring close collaboration between you, your banker, and your construction partners.


Step 1: Builder Acceptance

The first step towards full approval involves your construction partners. Your construction partners are typically required to complete a short application, provide several references, and produce acceptable licensing and insurance documents as required by government regulators. This step ensures that your chosen partners are reputable, reliable, and have a proven track record. For reputable home builders like Logangate Timber Homes, this process is fairly straightforward. 


Step 2: Assembly of Construction Documents

Next comes the assembly of your construction documents. These include proposed contracts with your General Contractor or construction partners, all third-party bids for site work, floorplans, elevations, and a comprehensive list of the specifications for your future home. It’s crucial to be thorough and accurate during this stage as it can significantly impact the speed and efficiency of your project.


Step 3: Building an Initial Budget

Once your construction documents are assembled, your chosen bank will use them to create an initial budget. This budget is compiled from all the third-party estimates (known as “hard costs”), an estimate of the “soft costs” (such as closing costs and inspections), and a “contingency” which is an additional sum set aside to cover any unexpected costs or cost overruns. This comprehensive budget is one of the more important steps in financing new home construction because it provides a detailed projection of the project’s financial needs. The step offers you a clear picture of the money you need to bring to the closing table.


Step 4: Specs and Plans Appraisal

With the budget in place, the Lender will then submit a full set of plans, specifications, elevations, and the initial budget to an appraiser. This “Specs and Plans” appraisal is conducted to determine the market value of your new home. Depending on where you live, this step typically takes about two weeks.


Step 5: Obtaining Final Insurance Requirements

The final step involves securing the necessary insurance coverage. This includes Title Insurance and a Homeowners Policy. Once these are obtained, any adjustments to the budget are made, and the entire package is sent to Underwriting for Final Approval and a Clear to Close.


The Home Stretch: Construction Draws

Once the loan is closed, advances on the loan are disbursed through a mechanism known as a “Construction Draw”. As the Borrower, you’ll complete a draw request form, sign it, and submit it, along with an invoice and a “Lien Waiver” from the General Contractor. These documents are then reconciled against the final budget.


The funds are paid directly to the General Contractor via money wire. Each draw is measured against the line-item budget. If a line item exceeds the final budget, it may be paid out of the contingency line item, ensuring your project stays financially sound while progressing smoothly.



Building a timber home is an exciting journey, filled with choices, challenges, and accomplishments. By understanding the steps involved in new home financing, you can confidently navigate this journey and watch as your dream home comes to life. The road to owning a custom timber home or a custom post and beam home may seem intricate, but with thorough preparation, careful planning, and a clear understanding of the financial process, you’ll be on your way to crafting the home of your dreams. So now that we’ve learned how a construction loan works, the next step is up to you! Start planning, keep these points in mind, and embark on your journey by contacting Logangate Timber Homes today!

Logangate Timber Homes

Logangate Timber Homes is custom home builder in Asheville, North Carolina, specializing in building beautiful Modern Post & Beam Homes, Pedestal Timber Homes, Chalet Timber Homes, and Timber Frame Cabins. We have over 50 years of experience building panelized Timber Frame Homes that can be found all over the nation and are particularly popular in Georgia, North Carolina, South Carolina, Tennessee, Virginia, and West Virginia. We are dedicated to designing beautifully crafted affordable Timber Frame Homes.

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Phone Number: 828-707-4383
Asheville, NC